When people think of “financial planning” their thoughts turn to how to manage their cash flow, pay off debts, save for retirement, or how to build a diversified portfolio.
However, while these areas can be components of a financial plan, the most important part is knowing what your goals are. Surprisingly, very few people have thought much about how they want their future to be, and even less have their goals written down.
Related: Why your financial plan sucks
Let’s face it; goal setting in and of itself can be a tedious process. If you had to choose between sitting down at the kitchen table with your spouse to set your future goals or laying on a beach in the Caribbean, you’d probably choose the beach.
But, how much would that trip cost? How would you pay for the airfare, hotel and souvenirs? How long would you have to save for it?
Most goals have some sort of financial component to them. When you align your money with your goals you’ll have greater success at achieving them.
To see how this works, let’s use the common mnemonic acronym used in business goal setting – SMART.
Your goal must be SPECIFIC
“I want to improve my finances and save more.” Not specific enough!
Take some of the questions used in journalism. What do you want? How will you achieve it? Who can help you? And, (why not?) why do I want this?
This goal has more teeth to it:
“My spouse and I want to buy a house in 5 years costing $400,000 in the family-oriented area of Sunnydale. We want to avoid paying CMHC fees so we need to save at least $80,000 plus 1% closing costs. We will do this by saving $1,500 a month. We will speak to our bank adviser to see whether it’s more advantageous to save in our TFSAs, or RRSPs and use the Home Buyers’ Plan. We use today’s dollars because we don’t know what the future market will be.”
Your goal must be MEASURABLE
How do you know if you’re making progress? You check your statements to see if you are on track. This keeps you motivated and spurs you on to the finish line. You can make adjustments as needed and desired.
“My wife received a promotion and a big salary increase. We will be able to increase our monthly savings to $1,800 and buy our home one year sooner.”
“Housing costs have really increased in our desired neighbourhood. Should we look elsewhere, or push back our purchase date, or save more?”
Your goal must be ACHIEVABLE
Your goal should be possible and within reasonable reach. Stretch your abilities to make it a bit of a challenge, but give yourself some wiggle room.
“If I put an extra $500 on my credit card payments, I will have them paid in full by 2018.” Why not try for $700 instead and pay them that much sooner. You can always cut back a bit if it’s a struggle.
Don’t be too hard on yourself. If you mess up, acknowledge it and take steps to move one.
Celebrate your successes.
Your goal must be REALISTIC
Don’t ignore your limitations. Be realistic about how much time and money it will take.
“I will retire at 35 and retain my current income of $6,000 per month entirely from my savings.”
“If I get a handle on my finances, I’ll be a millionaire by this time next year.”
“My family will live frugally and postpone all but basic purchases for the next 5 years in order to have our mortgage paid off.”
Your goal must have a Timeframe or Target date
You are less likely to give up if you can see the finish line. For long term goals like retirement you can break it up into smaller periods of time.
There are tons of on-line calculators that can help you set a timeline and dollar amount.
Setbacks happen – don’t give up, just set a new date.
A financial dream is something you hope for. A financial goal is something you’ve planned for.
Spend a bit of time to think creatively about the life you would like to live. What do you want in the short-, medium-, and long-term? Often, you can’t have or do everything you want, so you prioritize – what’s most important to you right now? In the future you’ll have new goals and some will no longer be of interest to you.
If you are married, it’s essential that you and your spouse both share financial goals and develop your plan together.
Then write it down. It’s the planning – not the hoping – that turns your financial goals into reality.
When you have a plan and specific targets for achieving your goals you chances of success will skyrocket.
The emotional component of your goals and aspirations are the greatest motivators you have to attain and maintain financial control, and you’ll begin to figure out new ways to make them happen.