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Welcome to the next – and final – installment of Financial Fridays
By now you should have a good sense of where you’re at. You’re tracking your income and spending, you know your net worth. Even your online presence has been given a pass to make sure your first impression is good.
The Point of Financial Goals
While knowing where you are is great, if you don’t have some goals in mind, it’s easy to become aimless. I’ve always found that if I didn’t set specific financial goals for myself, my spending would inevitably creep up. Lifestyle inflation would show its ugly head.
It’s not all bad – some lifestyle inflation can be healthy, and being too focused on a goal can burn you out. But knowing generally where you’re going is a crucial step to continuing to make smart financial decisions become second nature.
The point of goals is to make sure you’re on track and making progress toward the life you want to lead. Many people ditch goals – which have an ‘end’ – in favor of resolutions – which may not have a defined end.
The truth is, both have a place and a purpose in financial planning. You could have a goal to generate enough passive income to let you retire. That’s a good, concrete, finite goal.
Resolutions may be something that defines a behavior, like saving more money every pay period. That helps you get in the habit of doing something which may help you achieve your goals.
The usual advice is to keep goals SMART:
If you’ve worked in corporate America for at least a year, chances are you’ve encountered that acronym.
Don’t Target Net Worth Too Much
Okay, pet peeve time. I hate when people set 1-year net worth goals. With relatively few exceptions, it’s unrealistic and too volatile. Sure, it may technically hit all of the SMART categories, but it’s missing one key component in my opinion: it may not be directly actionable.
If you’re just starting out – or in this crazy bull market we’ve been having – chances are your net worth is growing by more than what you can contribute. This is a good problem to have, of course, but it highlights my underlying concerns with targeting net worth.
Which leads me to my next point…
Focus On What You Can Control
Market conditions are out of our control. I can adjust my asset allocation, of course. Generally speaking, however, the market is going to do what it wants to do.
So while I set targets I want to hit, I don’t like setting net worth goals on such a short timeline as one year.
The market tends to go up on average, but in a given year it could be down. A lot. Hinging a net worth goal on the performance of the stock market could mean I crush that goal.
I could also fail miserably or even go backwards from where I started the year.
If you can’t control it, it’s not something worth setting a goal around. There are things you can do that will directly influence net worth – like saving more money or paying down debt.
I prefer to set my goals around those savings goals instead. If the market performs well and I hit my targets, great.
If not, then I evaluate and ensure my asset allocation is still what I want it to be. But I don’t end the year feeling like crap for not hitting a goal even if I’ve done everything right.
Increasing income and decreasing debt are good goals. They are more in your control. Sure your boss may be responsible for your compensation, but there are ways you can demonstrate your value, ask for raises, and pick up side hustles.
The difference though is that you have a lot more control over where you end the year versus just relying on the market.
Action: How do you want to start 2019? Write down what you need to do, that you can directly control, to get to that point.
Consider Long Term Goals
When talking about financial goals specifically, a year is an inadequate timeframe for many bigger goals. Eventually, I’d like to retire – but unless we have some insane windfall that’s just not in the cards in one year, no matter how well the market performs.
Things take time to build, compound, and grow. Personal finance is a long journey, and relatively few things happen quickly. Most days, money is pretty boring (unless you’re following Bitcoin these days apparently).
So instead of thinking about today or tomorrow or even next year, think farther down the line. What do you want in 5 years? Who cares if you change your mind – five years ago I wanted to buy a duplex. Instead, I moved to California.
Life will change, but as the saying goes, failing to plan is planning to fail.
Action: Think of the life you want in 5, 10, 20 years or more into the future. Write down what you can do in 2018 to get you one step closer to that goal.
Hopefully you know where you want to be in a year, 5 years, and beyond that – at least from a financial perspective. Now is the time to build systems to support that vision.
I’m a big fan of automating my finances. We track our spending but set up auto-pay on all of our bills. One less thing in our life to worry about makes things easier.
The easiest way for most people to automate their savings is to increase workplace 401(k) contributions. If you’re getting a raise at work, throw it at the 401(k). Every little bit extra you can throw at it will make a difference.
The best part about this is that it’s an automatic, invisible lifestyle inflation hedge. If you don’t even see that money, there’s no temptation to use it. Unless you’re barely making ends meet, you’d be surprised how easy you adapt to slightly less money in a lot of cases.
Most banks will also let you set up automatic transfers between checking and savings accounts, This can be another great way to save money for shorter term goals, or just bulking up an emergency fund.
Action: Identify the systems you need to set up to accomplish your goals. Common ones are increasing 401(k) contributions, setting up auto-pay, automatically transferring money into savings, and paying off debt. After you identify them, set them up.
Revisit Old Goals
Not every goal or resolution needs to be one year long. Some will be longer and some will be shorter. Unfortunately, most people don’t check up on their goals and course-correct very often.
Now is as good of a time as any to revisit some of your old goals. What did you want to accomplish in 2017? Did you achieve what you wanted, or did you fall short – or go a different direction than you originally thought?
Not accomplishing goals isn’t the worst thing to happen. After I got laid off, I had a goal of joining another startup this year. After thinking about it, though, I decided that I’d prefer something that was less demanding on my time.
2017 turned out to have enough other stuff to keep me busy, and the last thing I needed was a high-stress (yet fulfilling) job as well. That decision turned out great. I enjoy the people I work with, and while my commute isn’t the best, I’m finding ways to deal with it.
Sometimes abandoning or changing goals can be the right decision. However, if you aren’t reevaluating on a periodic basis – monthly, for example – if you still LIKE your goals, then abandoning them isn’t good.
To 2018 And Beyond
Next week I’ll share how 2017 shaped up for us, and what we’re targeting for 2018. It’ll be a quiet year for us compared to the roller coaster that was 2017. Honestly I’m looking forward to a normal(ish) year, and being able to relax a bit and focus on other things.
I truly hope you enjoyed the Financial Fridays series! While this post specifically is kind of targeted toward 2018, everything in the series is relevant all the time. It’s never too late to start getting your financial life in order.
Have a safe and happy New Year!
What are some of your big financial goals for 2018?