This year, more than most, many of us are looking to the New Year for a fresh start. If New Years Resolutions are on your mind, one of them might be to finally get your financial house in order. If so, good for you!
But I have bad news: "Getting your financial house in order" is a poorly set goal that you have almost no chance of achieving. Now that I've burst your bubble, please allow me to show you the way forward to setting and achieving your financial goals in 2021.
If you've been to business school or listened to enough TED Talks, you've heard of the SMART goal framework. The reason it's so popular is because it works (really well). To be a SMART goal, a goal must be:
To demonstrate, I'll take a non-SMART goal and drop it into the SMART goal framework.
...goal setting is only the first step.
Non-SMART goal: "This year I'm going to start saving for retirement." Well, it is technically Measurable, it might be Achievable, we can assume it's Relevant, and it is somewhat Time-Bound. We're about halfway there. But it needs to be Specific, and we don't really know if it's Achievable.
SMART Goal: "Starting in January of 2021, I will contribute 4% of my gross compensation to my employer-sponsored retirement plan. I will increase my contribution by 1 percentage point each year until I'm contributing 10% of my gross compensation each year."
See the difference? This goal has a specific action at a specific time, and it will be easy to tell if it's achievable because we have real numbers to work with. We can't stop there, though — goal setting is only the first step.
Make a Plan
Once you've decided what you want to achieve, you will need to draw a roadmap to get there. Let's take our example SMART goal from above. There are a number of steps between where you are now and where you want to be. To implement this goal, you would need to:
- Check to see if deferring 4% of your compensation fits into your budget (is it Achievable?).
- Contact your employer-sponsored retirement plan to ask how you can set up contributions.
- Set up the contributions.
- Choose how you'll invest your contributions; I covered this back in October.
- Confirm on your first paycheck of January 2021 that your contributions have taken effect.
- Arrange for increased contributions each year, either automatically or by setting a reminder for yourself.
Simply setting the goal but not figuring out how you'll get there is almost a guarantee that your goal will go unmet.
Check Your Progress
Life changes, and your goals and plan need to change right along with it.
Having goals that unfold over many years, or goals that may shift over time, means checking your progress and correcting your course as needed. Let's look again at our example above. Assuming that you set the goal and took all the steps to meet your goal, now you need to check back to make sure the goal remains Relevant and Achievable. For example, what if you get a pay raise during the year? Will you increase your contribution amount before year-end? What if you decide that you are happy to retire later and feel you don't need to save as much? Maybe that means socking away 3% instead of 4%. What if you had some unexpected life changes that made cash flow tighter? Maybe you need to suspend or reduce your contributions.
Make sure that you're checking in periodically. Life changes, and your goals and plan need to change right along with it.
Consider Getting Help
For some investors, setting goals is easy and comes naturally; they don't need help and should not seek it. But others may find the process intimidating. Personally, I find annual goal setting is one of my least favorite activities — but I do it anyway because I know it's important and I've built the habit.
If goal setting and plan making isn't your thing, or maybe you need a nudge in the right direction, working with a Financial Advisor who focuses on Financial Planning could be the best thing you do for yourself. My practice is planning-centric, and I've helped dozens of individuals and couples set goals, make plans, and follow through on specific actions. Even if you don't hire me (I'm not everyone's cup of tea), hire someone who can help you get there. Few of us can do this alone.