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It turns out that people often struggle with setting financial goals, as highlighted by a recent report from the investment firm Morningstar. However, this could change if individuals engaged their emotions more deeply.
In their study, Morningstar had “318 individuals list their top three financial priorities, then presented them with a comprehensive list of goals curated by the researchers,” writes Liz Weston, a personal finance expert. “Three out of four participants adjusted at least one goal after reviewing the master list, and one in four revised their top priority.”
What this revealed to Morningstar, according to Weston, is that people often don’t have a clear understanding of their financial desires. Ray Sin, a behavioral economist at Morningstar, explained to Weston that this occurs because we tend to focus on the short-term and “we might place too much importance on goals that are top of mind.”
In essence, if a friend shares how well their 401(k) has performed over the past year, you might be more likely to prioritize saving for retirement right away, rather than considering your broader financial situation.
To determine your goals, Weston suggests jotting down your top three priorities and then comparing them to Morningstar’s comprehensive list. Pay attention to how many of these, she notes, are driven by emotions:
Be more successful than my peers.
Invest in personal growth (e.g., go back to school, learn a new skill).
Feel the thrill of investing.
Launch a new business venture.
Purchase a home.
Contribute to my children's college tuition.
Quit my job and pursue something I’m passionate about.
Take a once-in-a-lifetime vacation.
Move to a new location after retirement.
Provide care for my elderly parents.
Donate to charity or support causes that matter to me.
Achieve peace of mind regarding my finances during retirement.
Ensure my finances are stable in the present.
Pass on an inheritance to my family and loved ones.
Achieve early retirement.
Set aside funds for future healthcare costs.
Prevent becoming a financial burden on my family as I age.
Take control of my debt.
It’s often advised to keep emotions out of financial decisions. You shouldn’t act based on anger, sadness, or stress, for instance. However, connecting with your emotions can make your goals more achievable. Instead of setting an abstract goal—such as saving $1 million for retirement in 40 years because of a magazine article—you focus on what you truly desire from life, which can drive you to reach your objectives.
“Even goals that may not seem emotional, like debt management, can take on a more powerful meaning if you consider the emotions tied to them,” writes Weston. “For instance, paying off debt can bring a sense of comfort, security, and reduce stress.”
So, if one of your objectives is to purchase a house, for example, ask yourself why owning that home matters to you. If investing is your main focus, consider the emotions driving that choice. This way, your goal becomes more than just an abstract idea.
