Do you have written financial goals? If you have well thought-out goals, and have written them down, then you've already set yourself up favorably to meet them.
Perhaps you've heard of SMART goals — goals that are Specific, Measurable, Attainable, Relevant, and Time-bound.
Or … is it Strategic, Meaningful, Ambitious, Results-Based, and Timely?
It can be either of these … or many other combinations of S, M, A, R, and T words. You can season the SMART mnemonic to taste.
Are your financial goals things you can control?
One particular ingredient of SMART financial goals which may end up being forgotten is this: Is it action-oriented?
In other words, is there something we can actually physically do to work toward the goal? Can we play a part in making it happen? Do we control the outcome in some way, preferably a significant way?
If there's nothing really that we can do to affect the outcome, then I'd argue that it's not really a financial goal we're working towards, but a financial projection that may or may not come to pass based on any number of external forces.
Not that there's anything wrong with financial projections! They're quite useful:
- “If I have a 30-year, $100k mortgage at 5% and I pay an extra $100 per month toward the principal, I'll pay the loan off almost nine years ahead of schedule.”
- “If I consistently spend $200 more per month than what I bring in, and my savings account has $2000 now, I'll need to carry balances on my credit card in less than a year.”
- “If housing prices go up at 2% per year, then my $200k house will be worth $243k in a decade.”
- “If I want to save $10,000 in three years, at a rate of return of 4%, I'll need to deposit $262 per month to get there.”
And projections can be associated with goals with the right actions:
- We'll pay off our mortgage in 255 payments by adding $100/month to each payment.
- We'll regain a positive cash flow by cutting out the Starbucks runs to save $50/month, getting rid of our premium cable for $100/month, and ordering pizza twice a month instead of seven times to save $50/month.
Watch out for goals that are actionless projections
The mortgage payoff scenario mentioned above is a good goal because it's actionable (paying an additional $100/month) coupled with a solid projection (calculation of payoff time based on fixed-rate amortization).
But consider this statement:
“Our financial goal is to have a 5% increase in the value of our house this year.”
This is a financial projection, for sure, but is really a goal? Is there anything that homeowners can do to increase the value of their home?
If you've already bought a home, then you're mostly subject to external market forces. Following the sharp rise in American real estate prices in the early 2000s, the market drove prices down. A new kitchen and energy-efficient windows hardly increase the value of a home under good market conditions, let alone bad ones!
It's probably a minor choice of words but the thing is: The more we use particular words, the more we start to believe them. If we call something a goal, we're disappointed when we don't make the goal — even when it wasn't really ours to control.
Make goals that you can actually work towards.
Nice blog John. First step in achieving anything is set few small goals like steps toward your main goal. Why? because small goals are reachable and every small goal you realize, you are closer to final goal.
Good point! I’m always surprised when I see home value or stock value figured into the yearly goals.
Our goals are mainly under our control, barring the ever-fun unexpected house or medical expenses. It’s to grow — or at the very least use as little as possible of — savings while we figure out how to live without Tim’s disability check.
Great thoughts, If you are trying to achieve your goals you are probably on half way to make it. Sometimes when you are trying to manage things, to cut spending or to earn more looks like you never going to make it. Then it comes to micro goals, if you set them right you stay motivated and focused.
Like you said watch-out of goals which are emotionless!
This is biggest truth which I realized recently. The more we use particular words, the more we start to believe them. Every good salesman who repeat things about product, doesn’t matter if it is a lie, and he knows about it, he will start believing it is truth. I am in sales and I saw this with my own eyes.
I try to keep my goals smart and ensure they are things that I can actually control (“X’s”) versus outcomes (“Y’s”). This helps in that you can feel better if you did everything you could and things didn’t work out as you expected for items beyond your control!
Every goal you you write can be achieved. It is always on you and how much you are ready to invest yourself in achieving a goal. Every big goal is built by small goals, as you achieving small goals you are on way to complete final goal.
Few habits should be changed and you are on good way. For example when I quit smoking I managed to save around 300 $ per month. Now ten year after I realize how much I saved during that time. If I didn’t quit smoking I would still paying of my student loan. Thanks to this decision I am healthier and debt free. Great post, thanks for sharing!