Note. This is a fairly long post (way longer than usual). My hope is that if you’re contemplating creating your own financial goals, you might read through this post with pen and paper in hand so that you can start developing a few yourself. There are also some external links on Values that might add depth to the process, and would probably require a half hour to really consider them.
Twenty-sixteen is fast approaching and over the week leading up to new years, I’ve been pondering what I’d like to improve in my finances during the upcoming year. Although it’s an arbitrary time to review financial progress, I still enjoy marrying up the Christmas period, time off and New Years as a time to reflect and re-focus for the next 12 months. I’ve also been curious about how personal finance bloggers have fared in the past with such goals, and thought to increase my own chances of a good outcome I’d learn from them. Before composing this piece, I read a number of personal finance blog posts, the best of which were JD Roth’s Get Rich Slowly and Cait’s Blonde on a Budget. I also have a fairly good knowledge of Psychology, as it’s my main field of study.
The structure of goals
Most advice on structuring goals centres around creating SMART goals (you’ve probably heard of these). The idea was coined for management practices in the early 80’s, and subsequently adapted for goal setting. The gist is to make your goals Specific, Measurable, Achievable, Relevant and Time-bound. (Feel free to skip the next paragraph if you understand the concept already!)
A SMART goal is something like “save $2000 in an emergency fund by 1st July 2016”. This goal is Specific and Measurable (we can measure our success or progress vis-à-vis $2000 saved). It would be Achievable if the savings rate did not impose on cost-of-living or debt expenses and would be Relevant if the person didn’t have an emergency fund, was paying off or had no debts and only required a small sum for his or her situation. Finally, an end date of 1st July 2016 makes it Time-bound.
In my own addition to SMART goals, I add only a “B” representing that the goal should be phrased as a behaviour, ie. the how of the goal (…and yes, I’m trying incredibly hard to resist using the pun). To re-phrase the goal to B-SMART1, it could look something like “save $2000 in an emergency fund by depositing $330 per month into X account until July 2016”. I find this a useful addition, but of course you can take it or leave it!
So this was the standard structure of financial goals found in the bloggersphere, yet there were a few other considerations raised, below.
One Goal vs. Poly-Goals
Focusing on one goal is designed to increase your probability of achieving that goal by honing your focus and eliminating distractions. It’s a great idea but perhaps doesn’t lend itself well to financial goals where there are often very good reasons for pursuing multiple outcomes at any given time. Cait from Blonde on a Budget put it well:
The problem with only working on one financial goal is that it leaves you vulnerable in other areas of your financial life. For example, when I was paying down my debt, I was barely saving any money. If I had lost my job, sure, it would’ve been great to not have much debt, but I also wouldn’t have any savings to help support me until I find a new one.
I tend to agree, and prefer to focus on a small handful of financial goals at a time.
Short vs Long-term Goals
JD Roth suggested creating goals with the following time frames:
- Long-Term Goals (4-10 + years, retirement etc)
- Intermediate-Term Goals (1-2, possibly 3 years)
- Short-Term Goals (3-6 months)
- Immediate Goals / Actions (today and up to 4 weeks out)
While Roth didn’t attach specific time frames to these, one way to incorporate this idea could be to picture your finances as a business; you might have quarterly, half-yearly and yearly goals. You would then most likely have longer term goals, expanding out 2, 5, 7, 10+ years. Of course, people aren’t businesses and so you might think of your personal goals quite differently (although the time frames might be useful) but I’ve added my own time frames to Roth’s list above, as a suggestion.
Create a powerful “why”
A useful consideration is to attach meaning to your goals. This is really fleshing out the “Relevant” component of the SMART goal. Having a powerful why may help you stick to your goal when temptation is present or times are tough and it would be easier to throw in the towel. Understanding why you’re paying down debt, investing for the future etc not only provides greater clarity and support to your actions, it also weeds out goals that are not particularly important – you might realise there is no strong “why” and your goal was chosen arbitrarily, because others think it’s admirable or “should be done” or that you’re simply following the herd.
Understand and explicitly link your goals to your Values
Taking the above a step further, when you understand your own Values you understand how your goal contributes to living the life you wish to lead, both personally (aka ‘living authentically’) and materially. Knowing which value each goal behaviour helps you live out adds a further level of support. As an example, a value might be being “supportive, especially to family”. Goals of paying down debt might relate to this in that eliminating debt frees up income to support family members financially should they need it (of course, there are many non-financial ways to support family, which might be more important). A second example is that you might value “Freedom” to which investing for the future may help you live out such a value. You can find a list of common values here and this link (also at the top of the paragraph) provides a brief exercise you might wish to explore if you haven’t yet got a desired level of clarity on your values. You can use values as an adjunct to every goal, or just a few significant ones.
In summary, the framework I like best to set goals is Behavioural-SMART goals, linked with a powerful why and to my values. It takes a bit more effort and time than just jotting down a few goals on a post-it, nevertheless I think these are very useful tools. If you review your progress toward your goals (recommended!), having notes on the above also reminds you what you were seeking to achieve at the time and gives greater clarity which informs your modifying or discarding them as appropriate.
Of course, a post like this wouldn’t be complete without me putting up my own Financial Goals for 2016. I gave some thought to these the past few weeks and more specifically over the last several days. This included reviewing my expenses over the past 12 months via Pocketsmith and my likely income for the year. Some of the goals relate to specific outcomes (like reducing debt) and others, to ongoing actions (e.g. investment education). I’ll review them on an regular basis and more throughly mid-2016. You’ll notice that they’re not time bound (it’s the only aspect of SMART goals that doesn’t gel well for me).
wealthfromthirty’s Financial Goals for 2016
- Eliminate credit card debt of $2700 (AMEX)
- Pay down minimum $200 per fortnight (min 6.75 months)
- Stop using credit cards
- Use ING Orange Everyday Account with Cashback instead
- Create a $1500 ‘reverse credit card’ savings account, to draw down on for unexpected purchases, contributing $200 per month after paying out credit card.
- Reduce eating out expense to < $250 per month
- Use Bankwest Transaction account for these purchases only
- Increase emergency fund toward $10,000
- Automatic payment $200 per month
- Contribute $2400 to investments
- Automatic payment $200 per month
- Complete NYU Valuation Course Lectures
- One lecture per week Wednesday evening
- Read Damodaran on Valuation
- Read relevant chapter(s) following lecture
- Continue reading high quality value investing blogs
- Mostly in my WordPress side-bar
- Save $2600 for travel to Japan2 🙂
- Save $100 per fortnight once debt is eliminated
If affordable, I’ll also pay down debt and add to savings projects with bulk contributions.
By the bye, a few of my non-financial goals for 2016 are to exercise 4hrs a week, learn basic Japanese (there are excellent apps for this!) and submit my Masters thesis.
What are your goals for 2016?
1 damn, didn’t take long!
2 Japan obviously, is if everything else is on budget and eliminating debt works out!