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David Fulton is a Colorado Springs, CO fee-only financial planner providing Hourly and On-Going Financial Planning and Investment Management. While he works with a broad range of clients, David specializes in working with Active and Retired Military, Federal Employees, and Families with Special Needs Children.
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There has been a lot written about the importance of goals and goal setting of late. A simple google search, or a quick browse on Amazon.com, will provide you an exhaustive list of books and references that tackle the idea of goal setting. Intuitively we know the power of goals. In fact, we like them so much we make them every new year! Every spring, thousands of graduation speakers profess the importance of setting goals as it relates to chasing dreams. To underscore this point, look at all those motivational posters. You know the ones. A serene background, perhaps a willow tree, or bubbling brook… and of course a profound quote about achieving your goals and dreams. How about these goal laden quotes:
“Average people have wishes and hopes, successful people have goals and plans!”-Unknown
“Setting goals is the first step in turning the invisible into the visible”- Tony Robbins
“What you get by achieving your goals is not as important as what you become by achieving your goals”-Zig Ziglar
“Stay focused, go after your dreams and keep moving towards your goals”- LL Cool J
Ok, you get the point. I think every financial blogger at one point or another has waxed interminably on about the importance of setting financial goals. The point of this post isn’t to poke fun at the idea of goal setting…rather it is to demonstrate the importance of healthy, deliberate, measurable goal setting…and in turn…how to successfully implement goals that contribute to your vision you have for your family. Its better than a motivational poster.
It’s all about behaviors
There is a relatively new field in economics called behavioral economics that looks at the human dimension of decision-making. It studies the effects of psychological, cognitive, emotional, cultural and social factors on the economic decisions of individuals and institutions. Classical economics is built around the premise of a “rational actor”. In an ideal world, people would always make optimal decisions that provide them with the greatest benefit and satisfaction to maximize utility. That is, what choices a rationale person would make in a given scenario. It is assumed the rational person has self-control and is not effected by emotions and external factors. The problem is we know humans are decidedly irrational and flawed. Behavioral economics explains that humans are not rational and are incapable of making good decisions. Rather, people make decisions using all kinds of heuristics or "rules of thumb", intuitions, and habits that can often be described as irrational.
In addition to being irrational, humans tend to be poor at long-term goal setting as well. We are easily distracted. Our brains are wired to focus only on the near term and disregard the long term. Given two similar rewards, humans show a preference for the one that arrives soonest. Humans are said to discount the value of the later reward. This phenomenon is called “hyperbolic discounting.”
Researchers have identified that humans consistently will opt for immediate rewards instead of rewards down the road. To include when later rewards are materially greater. Generally people will prefer an immediate reward of $50 now than $100 a month from now. This explains our reluctance to invest for our future despite intuitively knowing that investing is critical in achieving our financial goals and explains why only 55% of Americans actually invest in the stock market. We stink at long-term planning because our brains are predisposed to short-term thinking. The real utility of goal setting is not something captured in a motivational poster, rather its importance is the ability to defeat our nature and short term inclinations.
Develop a system to achieve your vision
James Clear, one of my favorite authors, has a great piece on goal setting which perfectly describes the importance of financial and life planning. He uses the analogy of a Rudder and Oar to describe the process and implementation of goal setting. To sum up his piece, your goals are your rudder in a small boat; they give you direction and focus….but they don’t achieve anything by themselves. Rather, you must put a system in place to achieve them. The systems are your oars; they move the boat in the direction the rudder is pointing. The goal tells you what sort of system you need to put in place to actually achieve results. Rudders and oars, goals and systems. So how might that look for us?
Your system is your savings and investing process implemented one specific step at a time. The problem of saving for a the future is difficult, as you may not know how much money is required. Different people will have dramatically different needs and ideas of what is adequate. And most people may not even have a precise value because the answer is driven by different factors, both known and unknown to include the future availability of government programs like Medicaid and Social Security and your own health and lifestyle requirements.
This challenge forces us to go too big too early in our goal setting. That is, we set broad goals that will not see fruition deep into the future. We fail, because we are predisposed to failure. The idea of saving enough money to account for a lifetime of support for our child is daunting. And that is not the only goal we are focused on. We have a financial goal, a social goal, an educational goal, a medical goal, a lifestyle goal, an emotional goal, etc. Our goals get drowned out amongst themselves.
This introduces the idea of goal competition. Goal competition says that one of the biggest impediments to achieving your goals is the other goals you have because there is competition amongst your goals for your time and attention. Whenever you chase a new goal, you have to pull focus and energy from your other pursuits. The constant fight for time and resources is exhausting and distracting. Everything seemingly needs your attention. You may be fighting with insurance to cover a medical procedure while simultaneously engaging in an IEP meeting with the school, while working to find appropriate after care and social programs. Where then does financial planning fall in that spectrum? Usually straight to the bottom of the heap because it can’t compete with the urgency of the other problems, and when properly implemented the reward is far down the road and easily discounted in the present.
Be S.M.A.R.T. in your approach
So how then do we appropriately implement financial goals to compete in such a noisy world? We have to be smart. That is, we have to better define our goals by making them S.M.A.R.T. goals. S.M.A.R.T. stands for goals that are Specific, Measurable, Achievable, Relevant, and Time-bound (i.e. have a deadline). To have a good goal, you need to be very precise about what you’re trying to do, be able to measure it, ensure it’s achievable, is relevant to the long-term vision you’re trying to achieve, and has an end point in order to determine if it was completed or not.
Specific: Goals should be simplistically written and clearly define what you are going to do. Specific is the What, How, and Why. It should determine what the goal will accomplish and how and why it will be accomplished.
Measurable: Goals should be measurable so that you have evidence that you have accomplished the goal. You must determine how you will measure whether or not the goal has been reached.
Achievable: Goals should be achievable; they should be aimed at the upper limit rather than the lower limit, but still defined well enough so that you can achieve them. You must be capable of achieving the goal and have the necessary knowledge, skills, and attributes required to achieve them.
Results-focused: Goals should measure outcomes. They should define the reason, purpose, or benefit of accomplishing the goal and the result (not activities leading up to the result).
Time-bound: Your goals should instill a sense of urgency. Without feeling a sense of urgency, you will likely push it to the back burner. A time-bound goal has a well-defined end date.
Goal setting as it relates to financial planning
The benefit of financial planning is it is all about the process and the creation of a system. Typical financial planning first starts with the objective or goal in mind and then breaks that goal into intermediate objectives. Financial goals are usually cash flow related goals. By focusing on cash flow related goals, attention is focused on what’s controllable that can have real impact on the overall outcome, and the goals can be broken down into smaller near term objectives that your brain can actually rationalize.
This is replicated across all your goals until you have a list of specific, measurable, achievable, results focused, and time bound tasks to work towards and put your focus and energy against. An example of a S.M.A.R.T. goal for a young family may be the need to purchase a home. For example:
Objective: To pay the down payment required for the purchase of a future home.
S-pecific: I need to save for a down payment for a $300,000 house.
M-easurable: I plan to save $60,000 for the down payment.
A-chievable: I will reach my $60,000 goal by saving $1,000 every month from my monthly paycheck.
R-esults-focused: The purchase of this home will provide my family a comfortable and safe place to live, and allow us to connect with our community and neighbors.
T-imebound: By saving $1,000 a month, I will save $60,000 over the course of 5 years.
S.M.A.R.T. Goal: I will provide a comfortable and safe place for my family to live by purchasing a $300,000 home. I will accomplish this by saving 20% of the purchase price, or $60,000, for the house down payment by saving $1,000 from each monthly paycheck for the next 5 years.
Because we know we are predisposed to failure when it comes to goal setting, we must be S.M.A.R.T. and deliberate in the implementation of our financial objectives. We in effect, must trick our brains to achieve our financial success. So back to the beginning…
“Stop setting goals. Goals are pure fantasy unless you have a specific plan to achieve them.” – Stephen Covey.
A specific plan is a S.M.A.R.T. goal.