By Michael Sauer, a Certified Financial Planner from Source Wealth who works with individuals to achieve their ideal life.
Writing down your goals increases your chance of success by 42%, as proven by Dr. Gail Matthews, a psychology professor at Dominican University in California.
It is widely accepted that creating goals that are SMART goals (Specific, Measurable, Achievable, Relevant, and Time-bound) is another key determinant of success.
Compare a goal that you have in your mind such as “I want to retire” to one that you write down stating “I want to:
- retire in 10 years’ time. (Specific and Timely)
- be able to spend $100,000 per annum in retirement (Measurable)
- which means I need to accumulate $1,376,483 in superannuation by retirement to be able to draw down $100,000 per year for an assumed 30 years of life expectancy at a 6% rate of investment return. (Specific, Measurable, Relevant and Timely)
- Which means I need to double my superannuation, which I have worked out based on my assumed rate of return and employer contributions to be possible. (Attainable and Relevant)”
Which goal do you think is more likely to occur?
Creating a ‘good’ financial goal
It is worth delving into the SMART model a little further to help you apply it to your situation:
- Specific: A specific goal means there is no ambiguity as to the target. This is easier for financial goals because numbers are inherently objective. You should avoid statements like “I want to grow my business” or “I want to grow my wealth” and instead state “I want to increase my savings account to $100,000” or “I want to increase our business EBITDA from 10% to 15%”.
- Measurable: Measuring your financial goals are crucial to success. Let’s say in the example above you have $20,000 already saved relative to your $100,000 target, which you want to achieve in 12 months. Therefore, you need to save $80,000 in 12 months. It would then be wise to schedule time every quarter to measure or ‘track’ your progress. You should be saving $20,000 per quarter to reach the longer-term target. By measuring, you can determine your progress quicker, and if necessary, make changes quicker to get you back on track for reaching the longer-term goal.
- Attainable: Let’s say your only income is from your salary and your after-tax income is $100,000 per annum, then realistically we already know the goal isn’t attainable as it would be unrealistic to save $80,000 in one year when you are only making $100,000 net (given all of your other living expenses). However, if you were making $400,000 after tax, this could go be very attainable. Remember, to always build in some contingencies and buffers into your goals as nothing ever goes to plan. For instance, if your financial goal is a savings target, remember the myriad of things that could pop up such unexpected health costs, car repairs or your kids’ needing braces. Therefore, you need to make sure your savings target doesn’t rely on you putting in 100% of your surplus cashflow.
- Relevant: In this example, a goal to save $100,000 is pretty boring and potentially not relevant. However, if the goal was to save $100,000 so that you could use these funds as a deposit to buy your first home in the area you have always wanted to live, then suddenly the goal is more meaningful and you will be more motivated to stick to the plan to achieve it. As a Financial Planner, we often hear clients initially state cookier cutter goals such as reaching a certain savings target, however it is imperative to get to the person’s ‘why’ as that is what will motivate behaviour. Sometimes a client will go from a goal of wanting to upgrade to a big house to ‘keep up with the Jones’s’ however after a thorough deep dive, actually what is most important to them is to change jobs even if it means less money to be able to spend more time with their kids.
- Timely: The goal needs to have a deadline and progress milestones along the way to measure performance. Without these markers, the goal will inevitably drift out and the performance of the goal will inevitably suffer. Don’t be scared of creating timeframes, even if you don’t reach the targets because of forces outside of your control, the very fact you have timeframes will improve the performance of the goal.
Getting help setting and achieving your Financial Goals
If all these number have you feeling lost or you are concerned about your motivation for staying on target, remember you don’t necessarily need to set your financial goals yourself. There are a range of professionals and tools that can help:
- Financial Planners help individual clients set their financial goals and keep them accountable and on track for achieving them. We can do this with goal planning software as well as extremely detailed cashflow and asset projections tailored to the individual client and their goals.
- Accountants, Bookkeepers and Business Coaches can help business owners set targets and monitor your business progress for achieving them.
- More and more bank apps are integrating tools that allow you to set targets and track your progress. As a Financial Planner, we also use software that performs this role which helps client stay engaged, informed, and motivated for achieving their goals.
Your Next Steps
Now, before you move on to anything else think about your ‘why’ and what is really important for you. Then, create your financial goals through the SMART goal parameters. If you have many goals, prioritise them in order of importance and focus on the most important goal first. Consider also whether you need the assistance of another person or professional to keep you on track.
By following these steps you will be in a much better place to reach your Financial Goals in 2024, good luck!
