The Five Steps of Setting Financial Plan Goals

Here is how to increase success in your personal finance goals.

We don’t always take goal setting as serious as we should. Often, the plan is to do a few things and hope for the best. Your goal setting is the foundation of your financial plan.  I read years ago that most Americans spend more time planning their vacation than their finances.

 As with any project, start by creating blueprints. Your focus should be what type lifestyle you want. Whether its future retirement planning or current retirement management, the fundamentals of goals are the same. Regular maintenance or re-evaluating your plan from time to time is as important as the plan itself. Success in planning starts with the end in mind then works backwards. Establish the standard of living that you want in your retirement years as an annual income from investment earnings. It must be your plan, not what people think it should be for you. Create your lifestyle plan. You’ll have three types of components; needs, wants and wishes. Plan for inflation. A $50,000 a year lifestyle in April 2001 would cost $75,481.63 in April 2021. You can use U.S. Bureau of Labor Statistics CPI Inflation Calculator to play around with past inflation to better understand how to add it to your planning.

Financial goals have five components; Specific, a Time, Realistic, Written and Monitored. Here’s how they fit together.

Be specific

A goal must be specific. Otherwise, it is a wish. As it relates to your retirement, I prefer to call it financial security or financial independence. It sounds more appealing and also includes the responsibility of maintaining financial security even after you enter retirement. When you reach your goal, you may not want to retire, especially if you enjoy your occupation. So, let’s think of it as the lifestyle that you want to create. Even if you sell your business or retire from an employer, even early, you may continue on as a consultant. Wouldn’t it be nice to have that option?  To achieve your goal you must be specific. Saying that you want to build financial independence isn’t enough. Saying that you want $X.xx in your investment account is an improvement, but still not enough. “I want a lifestyle that will cost me $X.xx per year in today’s dollars.” Now you have something to work with. How much assets will you need to generate that annual income. In a future blog, we get down to details. Subscribe to my newsletter at the top of this page to get a notification or bookmark this site and visit regularly. A rule of thumb, for discussion only of course, is to withdraw 4% of a portfolio annually. That means that a lifestyle of $50,000 per year would need an investment portfolio of $1,250,000. 

Pick a time

 “Sure, I want to be financially independent one day” won’t get you there. You establishing a specific date is required to have an achievable plan. That certain date or number of years goes into the calculation to determine how much you need to set aside monthly. Give yourself a little flexibility because investment returns are not exactly predictable. This same process applies to your other financial goals, too. Set short-term, intermediate and other long-term goals to serve as a guide or benchmark to your ultimate goal.

Be realistic

Reaching a goal in a few years for which you have not started saving is not realistic. Nor is a goal that requires saving more than you have or a goal of a retirement income substantially more than you earn now. It’s ok to shoot for the stars, just make sure it’s stars in your galaxy.

You may choose a monthly savings goal that will push you a bit and that’s ok as long as you meet the goal. Each month that you do so builds confidence that you can continue. But, don’t be too rigid. You have to live your life now, too. Find a balance between now and later. When your plan is too rigid, its hard to stick to. Falling short of your goal regularly can be discouraging and cause you to abandon your plan.

To ensure that you can keep your monthly savings goals there are two other moves you must add to your plan. First, a budget to plan what you spend and that keeps a sufficient amount aside for saving. Second, pay off your debt like credit cards. Don’t sacrifice all your savings plan to pay off debt faster because compound earnings and the time value of money is a valuable friend.

Get it in writing

Writing your goal down and placing where you can see it daily is as important as the preceding two components. I’m not referring to your official written financial plan document. I mean your summary, “I will have $X.xx by (date)” written on a notecard posted beside the bathroom mirror, framed and sitting on your desk or on the welcome screen of your laptop or smartphone.

The mind is a powerful tool. Napoleon Hill, author of ‘Think and Grow Rich’ recommended that you read your financial goal each morning. Seeing your goal and reading it daily keeps you focused. It’s easy to get distracted by some new tech device or fall for eating out more often than you should when you don’t have a daily reminder. But, every dollar that you spend unnecessarily is a dollar that cannot earn dividends and interest for you. Hill wrote “Whatever the mind can conceive and believe, it can achieve.” Your daily reading of your goal is how you begin to believe something that you may not have at first believed.

Monitor and Modify

Since life is not an exact science monitoring your plan is a critical component. The lifestyle that you want may change over time. Now your financial goals will change. Maybe you didn’t always stick to the plan and now you need to make up lost ground. What if things work out better than you expected; a stock market friendly to your goals, a larger than expected inheritance or bonus money from your business or employment.

Whatever the reason, if you’ve achieved financial independence earlier than expected, you must adjust your plan for more years in retirement. The obvious option is to draw down less money per year thereby allowing more money to draw interest and dividends and also extend the years that drawdowns can be taken. There is also the idea of segmenting your money based on time horizons. By having two buckets of money, you can allocate one with an income objective for current early income and another with a growth objective for later years.

A regular practice to monitor and modify your asset management is through regular rebalancing. These comes into play if you use an asset allocation model of diversifying your assets into classes that have different patterns of ups and downs like Consumer Discretionary versus Intermediate Bonds, for example. Read more about asset allocation here.

Now that you know the basics of setting goals the next step is to create a financial plan to reach your goals through a realistic method. The details of financial planning can become complex. Fee only financial planners sell their service but are not influenced by products, financial companies or commission agendas. Licensed financial practitioners are regulated by government entities but make their money by selling products and usually don’t do planning. My objective is to provide information so you can better deal any of these professionals.

Let me know what part of this blog you liked best and any questions that you may have by clicking here. You can send me questions or comments about your interactions with financial professionals in developing your plan. I’ll do what I can to help.