By Massi De Santis
Setting meaningful goals, although a key step in any financial plan, is also a step that most of us struggle to do. We spend much of our lives seeking fulfillment by adding dimensions, complexity and distractions to our life that at some point we find it hard to devote our attention to what’s really important to us. That’s what goals are for: they help us identify what is really important and help us channel our energy towards them. As Mark Twain once said, “The secret of getting ahead is getting started.”
Goals get you started. So, this year, commit to sitting down and identifying some meaningful goals. Don’t worry about how you are going to achieve them yet. Just set the goals and write them down on the first page of your planner or notebook. That’s it.
Goals Setting Process
There is plenty of advice on goal setting. Here at DESMO Wealth Advisors we have created a goal setting process, summarized below. If you are new to planning, we suggest starting with three goals. If you have a plan and you are going through some goal setting session as part of your annual plan review, you can add more goals.
However, we try to stay within a maximum of five goals at each point in time. Before you get started, get some scrap paper and a pencil. If you have a partner or a close friend, ask them to join you and make it fun.
Values vs. Goals
In financial planning as in other areas of life, goals are measurable objectives that require planning and effort to achieve. Pretty much anything meaningful or fulfilling requires planning and effort: meaningful relationships, career accomplishments, health and fitness, marriage, raising a family, starting a business, mastering a profession, you name it. However, not everything will be meaningful to you. You can’t set goals for yourself based on what goes viral on social media or what your coolest peers are doing at work.
If a goal is not meaningful to you, you are not likely to stick with the planning and work required to achieve it. Your values reflect what’s important to you at this point in your life. This brings us to our first step.
Step 1: List Your Top 5 Values
Your values represent the intangible things you care about, they are the WHY of your plan. In financial planning, they help answer the question: Why is money important to you? Values provide the emotional payoff that’s required to take action, monitor progress, and ultimately achieve your goals. Here are some examples to help you get started: sense of security, starting or providing for a family, cultivating friendships, having a fulfilling marriage, adventure, peace of mind, personal growth, creativity, freedom, education, etc. It’s OK if your values are not on the aforementioned list. Once you have a list of values, it may help to prioritize them. What’s most important to you?
Step 2: List Your Goals
Goals are measurable objectives that require planning to achieve. They are the WHAT of your plan. Start from your list of values, and ask: what measurable result(s) will help me fulfill my values? To start with, a rough list of goals is enough. Some examples are: having early retirement, traveling, living debt-free, getting a bigger house, driving a newer car, going on a family vacation, starting a business, paying for college, owning real estate, leaving inheritance, donating to charity, etc.
Step 3: Find Your Top Three Meaningful Goals
Prioritize your list of goals using your list of values. For each goal, ask yourself, what value does this goal help me fulfill? Narrow down the list to your 3-5 top goals. This is your preliminary list.
Step 4: Refine Your Financial Planning Goals
At this point, you probably have some good ideas of your most meaningful goals. However, chances are that the goals are still a bit vague to be measurable and actionable. For example, at this point, many of our clients simply list retirement as a goal. But retirement has a very different meaning to different people. College, housing, travel, family goals, etc., can also be very different for different people. So, it is important to refine your goals, attach at least a rough dollar value to them and a desired time horizon.
To help you refine your goals, use the following questions and considerations for different goal categories. You will be able to answer some of these questions, but for others you may need to do additional work. Write down this additional work as a list of actionable items to get you started towards your goals. Two birds with one stone!
The retirement goal can be very different for different people. The first question to ask is what does retirement look like for you? Where will you be in retirement? What would a year in retirement look like? What will be the major spending changes from the way you live your life now?
Start by writing down all the ways in which retirement will be different from today. Then figure out what these differences mean in terms of expenses. You may want to travel more and your health care expenses may go up, but you may have paid off your mortgage and your kids will be independent by then. Make a budget for what your needs and wants will be like in retirement, and make an allowance for taxes. This is your retirement income goal.
Some people view retirement as achieving financial independence, meaning they can afford to trade off a good portion of their income for increased flexibility or to work on their passions or to run their own business. That can happen relatively early, like in their 40s. The approach to this goal is similar. The difference is that you may count on additional income, you have to think about health care in the years prior to Medicare, and you have to plan for the fact that tax advantaged accounts like 401(k)s or IRAs are only available to you the year you turn 59 ½.
After you have done a budget and set a goal, you may wonder when you’ll be able to retire given current savings and planned contributions to your retirement accounts. Congratulations, you have figured out the next steps towards your goals! Start with a retirement income projection, or understand the value of your savings in retirement.
Lifestyle goals include big-ticket items that are unique to your personal values and priorities. They are typically easier to define in terms of amount and time horizon than the retirement goal. They include the purchase of a first home, a relocation, a vacation home, new cars, etc. In all these cases, we have an idea of what we would like, what is reasonable with our budgets, and when we would like these items. At this point we are just listing goals, so do not worry about feasibility yet.
Some lifestyle goals may overlap with the retirement or family goals we describe below. For example, a spouse may want to leave the workforce to have more flexibility and spend more time with family. In this case, you can quantify the goal using the same approach we suggested for retirement. Start with expenses that will change over the course of a year as a result of this choice. How much lower income? How much lower expenses? The difference is your lifestyle goal, on a yearly basis.
Family and Estate Planning Goals
A common family goal is future college expenses. In this case, you can use online tools to get a pretty good idea of what the costs might be for your colleges of choice. The US Department of Education has good information on individual colleges, including costs by college, after deducting the average financial aid for in-state students. More information about college costs can be found on the College Board website. Your goal should take potential financial aid into consideration.
Other family goals involve the support or care of family members. Do you have members that might need long-term care? Here is a resource to help you define that goal.
Other common goals are family vacations. Do a bit of budgeting or research to figure out potential costs. How often would you like to do it? Annually, every other year? You may set a goal for a normal annual vacation, and then have a larger budget every two years for a bigger family vacation.
Finally, we include estate planning as part of family goals. Estate planning is a plan for how you want what you own distributed to your loved ones during your life or after your death. This is typically accomplished with a will or a trust. One important component of estate planning can be life insurance. Do you have a plan in place to care for your family and loved ones in the case of your death? Other areas of planning involve making sure you have directives and fiduciaries in case you become incapacitated.
Personal growth goals involve both a personal and a financial challenge, and include starting a business, achieving financial independence, obtaining a professional designation and professional advancement. From a financial perspective, setting this type of goal involves some budgeting. How will the two sides of your budget – income and expenses – change as a result of the goal? When and for how long? In the case of a potential business, make a business plan and project your business income and expenses, at least for the first three years.
Financial and Investment Goals
One important reason why you may be reading this is that you have accumulated enough assets spread over a number of accounts but you have never thought seriously about investing for long-term goals. You have one or more IRA accounts and 401(k) accounts, some investments in taxable brokerage accounts, company stock or stock options, extra cash in your checking account and so on. Have you ever stopped to think about how to get the most of your investments for your goals? Create an investment allocation that aligns with all your monetary goals, including retirement, lifestyle, family, and personal growth goals. Use a goals-based investment approach to do it.
A commonly overlooked investment goal is to set a safety net. This is an amount of money that you set aside for unexpected expenses, due to job loss, unexpected home or car repair, unexpected health expenses, and such. A typical amount is about 3-6 months of unexpected expenses, invested relatively conservatively.
Other financial goals may have to do with risk management. Are you protecting your assets – including your human capital – from potential risks? Do you have potential liability risk stemming from your business? Do you have enough liability coverage to protect your assets in case of a lawsuit? High net worth individuals may need to go beyond the protections they have through home or auto insurance.
What to do next: Should You Hire an Advisor?
So, which goals make your top three list? Are you sure? Start by listing them, then answer the question: which of my values do these goals align with? Next, what are you going to do about the goals? A good next step can be to work on some of the refinements suggested above and to get an estimate of each goal’s financial magnitude. Are the goals feasible given your current savings and spending habits? What strategy will you put in place to achieve those goals?
As suggested above, the list is just the beginning you need to get ahead and make progress towards your goal. Now you have to decide how to achieve them. Having spent time on the goals and having raised the right questions put you in a great position to identify and evaluate next steps. You may want to consider whether you may benefit from working with a trusted advisor on your goals. Like a coach or a personal trainer, a trusted advisor can help you design a plan you can stick with to reach your goals.
About the author: Massi De Santis
Massi De Santis is an Austin, TX, fee-only financial planner and founder of Desmo Wealth Advisors. DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow, and protect their resources throughout their lives. As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.