Goal setting is integral to the process of planning for your financial future. Without goals, it is difficult, if not impossible, to plan properly and adequately for the many aspects of your financial life. For example, if you have no specific purposes for your money, will you have adequate motivation to save for the future? Even absent any financial goals, you will still need money to live on in retirement! Even if you are motivated to save, without financial goals how will you know whether you have saved enough?
The goal setting portion of the financial planning process involves the following basic steps:
1. Take stock of your current financial situation
a. How much are you earning?
b. How much are you spending?
c. How much are you saving?
d. What are your assets and liabilities?
2. Identify your financial goals (once you know where you stand financially then consider where you would like to be at various points in the future).
For example, a nearer-term goal might be to save $35,000 over the next five years in order to have an adequate down payment to buy a house in 2019. A longer-term goal might be to save $5,000 in a 529 plan account each year for the next eighteen years so that your newborn will have a healthy nest egg to help offset their college expenses.
3. Prioritize your financial goals
Saving for college may be more important than saving to buy a beach house. Saving for retirement may be your top priority.
4. You may also want to put ranges around your goals.
For example, your goal may be to retire at 65 but you would be willing to work until age 68 if that meant additional financial security in retirement.
Keep in mind that goal setting is not only about saving enough money for retirement or providing your children with a college education. Rather, it is far broader in scope. Goal setting can also be about changing your career path, starting your own business, taking a 12-month sabbatical from work, moving abroad, expanding your philanthropic efforts, or returning to school.
For longer-term goals, you may want to include intermediary steps with shorter time horizons. This way you have the satisfaction of achieving these steps over time rather than having a large longer-term goal hanging over your head. Thus, if your goal is to save $35,000 over the next 5 years to use as the down payment on a house, you may want to break this into smaller annual goals.
We have found that many people are not accustomed to articulating their financial and personal goals. It can be intimidating to write down a goal like “I want to leave my job within the next three years in order to start my own business.” This kind of goal is pregnant with possibility – the possibility of success and of failure. The fear of failure looms large as does the fear of the unknown. This type of goal may also be something that one spouse or partner has not discussed with the other spouse or partner. However, even though goal setting can be unnerving and even gut-wrenching, it is an important exercise to do and one that should be reviewed at least annually as goals and priorities change over time as do people’s financial circumstances.
We have also found that, in the process of goal setting, many people write fairly nebulous and generic goals. For example, we frequently see the following types of goals:
“I would like to have enough money to retire.”
“We want to travel while in retirement.”
While these are admirable goals, they suffer from a lack of clarity and specificity. When you are writing down your own goals, think about being specific and setting a reasonable time frame. For example, the travel goal above could be rewritten this way:
“We want to have a travel budget of at least $5,000 per year from ages 65 through 85.”
This more specific travel goal is also now measurable. We can figure out how much you should be saving now to help you have enough money later to travel on a $5,000 annual budget. We can also figure out whether or not this $5,000 per year travel budget is a reasonable and achievable goal given your financial resources and in the context of your other goals. By comparison, the prior vague travel goal does not contain any parameters around which you can plan.
Once you have set forth your financial goals and these goals have been evaluated to ensure they are realistic given your personal financial situation then you can begin to plan for how you will achieve them over time and how you will monitor your progress along the way.
We can help you with goal setting and the planning needed to help you achieve your goals. Please do not hesitate to contact your financial advisor here at BLBB to get started.