Thursday, November 22, 2012

Rule #20 Set Financial goals

Goals in writing are dreams with deadlines - Brian Tracey

Do you have financial goals?  I just finished Millionaire Upgrade by Richard Parkes Cordock - a great book by the way - and it reminded me of one thing that we have found to be very important for our progress towards Financial Independence and that is:  Setting Financial Goals.  One quote from the book is "A goal without a plan is a dream".... I'm going to memorize that line because I think its a great line.  Back to us... Every year, we set or revisit goals for our annual investment cashflow growth, goals for our savings account, goals for debt reduction, goals for RRSP contributions, and goals to reduce our spending (cut the fat).

For us, there are three things you need to have figured out before you can call your dream a goal:

  1. What do you want to do with your money?  Do you want to become a mulit-millionaire or do you just want live a minimalist work/debt free lifestyle?  Do you want to work part-time halfway through your adulthood or full-time til you kick the bucket?  Do you want to go an a big vacation this year?  Saving for a new car?  Is your goal to reduce debt or become debt free?  If you don't know what you are saving for, you are almost surely destined to fail.  While you could argue the why is just as important as the what, I think the what is probably the thing to keep posted on your fridge as a motivator.  
  2. Why do you want to do this with your money? Here is the deep soul-searching part of having a goal.  Are your goals inline with your values?  Do you want to work til you are 75 or are are you trying to leave the workforce as soon as you can so you can do other things?  Do you really really want what you are saving for or are you doing so because you feel its what you should do?  For us, we like to be in control of our lives.  We want to leave no debt to our children and we dont want to be a burden on them as we age.  Thats why we choose to invest and save the way we do. We want to be good role models to our kids and walk the talk.  That is the Why for us.
  3. How are you going to get there?  Here's the part where you need a plan, or your goal is just a dream.  This part is where you discuss or ponder the sacrifice you are going to make.  Thats right, financial planning involves sacrifice.  Are you going to manually save that money or have it automatically deducted from your account to make it easier?  How much do you need to save? Are you going to increase you income, or decrease your spending to meet the goal.  Will it be a monthly contribution or a once a year event (like at RRSP or tax season).  If you have a spouse, how will you keep this all straight?  Will one partner keep track or do both need to be involved?  

Your goals obviously need to be realistic, but we like to have stretch targets that may be reachable but require some additional sacrifice or creativity.   We assess and set these goals usually around New Years and revisit them at tax-time in March.  Then, we do what almost nobody does... we write it all down.  Thats right, we write it down every year.  There is a saying in the Geologist Community that goes: "A map is just a sketch until it is coloured" or "A map becomes truth once you colour it in".  For us, its the same thing about goals - writing them down makes that goal more official... not just some talk we had over coffee.  Some friends of ours think we should lighten up over this point, as if we're kooks for treating our goals with this kind of official discipline.... but there is never an argument in our house over what we are saving for.  We are always on the same page because the goal is there for us see.   We are committed to it.  We have personal financial goals and we have family financial goals.  We both know what they are and are both commited to those goals.

We've had this approach to setting financial goals for about 10 years and we've missed a few yearly targets, but its not because of lack of trying.  The odd expense has come up that we weren't expecting that threw us off.... but it actually led to us creating an emergency fund as one of our goals the following year.  After doing if for 10 years, we are better now at setting those goals and it has become significantly easier to meet or beat them.

Some of our past goals were:

Max out our RRSP when it makes tax-sense to do so.
Grow our Investment cash-flow by 8% per year
Build an emergency fund in case the car craps out and we have to buy/fix
Pay off our non-tax efficient debt
Save up enough to buy a new bicycle.

The last aspect around having a goal is about executing point #3.  Executing point #3 relies on how committed you to points #1 and #2.  I think its pretty self explanatory from here on so I won't bother you with motivational speak.  Either we follow through on what we say we are going to do or we do not.  Having serious and reasonable goals, and our ability to follow-through has been perhaps the most important thing for our personal finances.  For our age cohort, we are in pretty good financial shape, and I credit a large part of that to having achievable goals and executing the plan.  Do You have Goals or do you have Dreams?

No comments:

Post a Comment