In life, we’re often told that we need plans. Plans for our careers, our family, and our future. But many of us fail to think of our money needing this same careful planning. As a result, we often suffer financially, often when we don’t really need to. So, it’s important to have solid written financial plans, or our dreams of having a secure retirement may be severely jeopardized. Here are six steps to creating a great written financial plan so you can have the finer things in life later on.
Have you ever noticed that it is often a struggle to reach certain goals in life? We aspire to either lose weight, find a better job, or even find the right person in our life. Our goals are as varied as there are people in the world. We all know that setting goals are important in life. They give us a bit of focus towards achieving our dreams for success. It gives us that edge, otherwise, we would be directionless, not as efficient.
It’s the same financially. We’re all aware that having financial goals in our lives will most likely be very beneficial to us. There are plenty of reminders out there for us. We read about the importance of reviewing our portfolios annually. We hear about it on our TVs, expounding on the great returns a certain stock would have given us had we only planned (and bought) accordingly. We’re told by our financial advisors to think ahead.
Heck, sometimes even our employers will help us along, offering financial planning talks that concern our 401k at work.
And perhaps you are proactive and implement this in your family. Maybe you’re one of the few that start out the New Year with a firm plan in mind for your finances this year.
But my guess is, you’re not.
And you are not alone either. There are numerous studies out there demonstrating the lack of savings rates for Americans. It’s the same news for individuals having a solid financial plan.
A study done by Charles Schwab shows that 75% of people don’t have a written financial plan.
Have you ever thought about why your employers now often automatically enroll you in their 401k plans versus waiting for you to make the first move? They know that on your own, you’ll most likely not do it.
And even though many of us are taking small steps financially by paying off our debt, taking care of our emergency funds, and not living paycheck-to-paycheck, there is still this one more step ahead that will propel your progress: setting firm financial goals that are measurable and achievable.
So, What Do I Mean By Setting Financial Goals With A Written Financial Plan?
Essentially, a financial plan is an outline of your current situation, your money goals for the future, and the steps you’re going to take to get there. It’s the same as any other plan you make.
Almost.
You see, with most plans in our life we often make plenty of them but keep only a few. We prioritize the ones that are truly important to us and abandon the rest (or maybe set them aside for a while). Often we make decisions about what to but at the grocery store, where to go out for dinner, or about taking that long-awaited vacation. We may or may not go through with them.
But for financial plans… well these are a bit more impactful on your life. These can literally change your destiny for good or ill which we’ll cover in a bit.
But first, let’s start by determining what financial goals are.
The Short And The Long Of It
A goal, of course, is something you want to achieve. It’s generally accomplished by carrying out a (hopefully) well-devised plan. But for our financial goals, we want to have more than one. Specifically, we want both short-term and long-term goals. There can be more than one in each category and some of this will depend on your age, but it’s important no matter what decade of life you’re in.
Think of this as a road trip, only this one involves your finances. Like any road trip, you have to determine the destination you want to arrive at. Then, of course, you’ll plan a bit of the detail along the way: what towns you may stop at before you get there. Perhaps some activities you may want to do that will heighten the experience. That’s how we usually think of it: that it goes smooth and we make it up as we go along.
But the reality is much harsher than this. If we take a trip we need a few more details planned out. We have to account for having enough gas to get where we’re going. Where to refuel if it’s a long trip. Which highways to take. If we’re flying, it’s even more complicated! If we don’t plan for the details (and instead skip them) our trip will probably take an unexpected twist.
It’s the same with your financial plans. It’s easy to try to “wing it” having only an end goal in mind. For most of us, we just have a generalized idea of a secure retirement ahead of us. Perhaps fulfilling a few dreams in those Golden Years, right?
However, having a generic goal like that without setting a few detailed short and intermediate goals along the way is like setting off on your road trip without a plan.
If we don’t plan our financial goals carefully, making things up and hoping things go smoothly, our destination probably won’t be reached (at least not the financial destination we had in mind).
How To Set Financial Goals
1.) Find out what’s important to you
As with any goal, the things you seek financially have to be especially significant to you personally. The idea is that my goals probably won’t be your goals. And
they shouldn’t. Thus there is no one recipe for doing this.
Take a moment and examine what you want in life. For most, it’s probably a life well lived with family and good friends. Being healthy and enjoying a fruitful retirement. But that’s too general. It’s time to get specific in your desires.
Are you a traveler? Do your kids live far away (or might someday) and you want to travel each year to see them? Perhaps you want to own a travel trailer and explore the country? Or do you want to travel the world instead, widen your reach? Would you rather stay in your retirement home (that you’ve hopefully paid off), snuggle in with a good book? Obviously, these extremes demand vastly differing amounts of money.
So, take some time and imagine what you want your life to be like. Because if you don’t, your life in retirement may not be what you had (failed) to plan for.
Tip: be careful not to tack on too many “goals” or things that are important to you. You want to be specific but concentrate (for now) on only 5 key things. Otherwise, you’ll get lost in oversaturation. Focus on too many goals and you won’t even start with the most important one in your life.
2.) Take a look at your finances
Yep, it’s time to look at them again. And again. You have to establish a starting point to figure out where you want to eventually be. Go back to step one above: find out what’s important to you and realize you will have to fund this desire. As previously stated, each specific goal in retirement will require differing amounts of money.
Let’s start by paying off any debt you may have. And keep it that way. One of the surest ways to kill your future is carrying (and amassing) large amounts of debt. Debt is just your future money for someone else. It’s time to keep it in your pocket instead and allow it to work for you.
Get out of debt and finance that emergency fund. Then start funding that goal that’s important to you. Go old-school and write these out for now. There is nothing like having a goal you can see daily to remind you where you want to be. Because let’s face it: if you don’t fund your dream, no one else will either. It’s up to you! So look long and hard at that budget and make room for your future self in there.
3.) Set specific (SMART) goals
Ok, now we’re getting into the details. I’m sure you’ve heard of the SMART acronym but in case you haven’t it stands for: Specific, Measurable, Achievable or Attainable, Relevant or Realistic, and Timely. This acronym helps you fine-tune your goals and put them within reach
Specific:
Let’s start with this one. This is just as it sounds: your goals have to be very specific (vs too general or vague). “Having enough money to retire” is just too vague. What does that actually mean for you? $500,000 or $5,000,000?
Measurable:
You should be able to quantify your progress. “I’m going to save $3,000 this year in my Roth IRA and will increase that amount to $4,000 next year” is certainly measurable. You’ll be able to determine specific details that you can track if your goal will be met.
Achievable:
Obviously, your goal has to be something you can actually attain. Saving $100,000 dollars this year may be impossible if you make half that at your current employer (although technically possible with side-hustles, etc, but let’s stick with what’s probably really attainable!)
Relevant:
Let’s keep all our goals (short and long) germane to the overall objective. Losing 50lbs this year may not be as relevant as saving $500 this year when you’re dealing with personal finance.
Timely:
Yep, we want that goal to have a deadline. Otherwise, your goals could just drag on and drag on….
4.) Allow your short-term goals to fuel your long-term ones
One of the best techniques out there for any project or goal is to take it one step at a time. If you’re going to write a book, you have to first create chapters. If you want a decent retirement, you have to have specific, measurable, and achievable shorter-term steps you conquer along the way.
Think of things in sub-categories of the main goal. Do you need a million dollars before you can retire? Depending on your timeline you’re going to have to break it down into stages to surmount. Let’s look at an example.
“I’m going to fully fund my emergency fund and pay off my debt in the next 3 years.”
This then works into, “I’m going to then accumulate $40,000 in the next 5 years by investing in a market Index Fund.”
“Over years 9-15, I will increase my contributions to $800 a month into this fund with an intent to reach $115,000 from both my contributions and market growth.”
Then allow those short-term wins to be fuel for the longer-term goal.
Be as detailed as you need to be. Go crazy and set yearly goals (who says you can’t do monthly as well?). The idea is to start small and let those “wins” snowball into the larger goal. These will not only keep you motivated along the way, but they will allow you to modify your plans if needed, and you will ultimately achieve more than you otherwise would have.
Trust me, before you know it you can easily reach that millionaire status by raking in those early “chapters” of accomplishments.
5.) Automate your goals
This is one of those amazing secrets out there, easily doable in today’s age. We live in an era of automation. We can automate our bill payments. Even our supplements are easily set up to come once a month. We can also automate our investments. And this is something we should definitely do!
Figure out a dollar amount that you can invest toward your goals. Then have it automatically deducted into the appropriate account. If you don’t automate things, it will be considerably harder to achieve your goals (especially financially).
Neglect this step and it will take tremendous willpower to make this happen every month. When it comes to money, we can all find a use for money if it’s left in our bank account. So don’t leave it to chance: automate it!
Automate those 401k contributions. Set recurring Roth IRA additions. Then set those accounts to automatically increase the amount you put in every year (yep, you can do that too!). Before long, you’ll be surprised at how fast your financial goals will be met.
6.) Review your progress regularly
Yes, you have to check in from time to time to the progress on your goals. You have to stay on track. No one else is going to do it for you. And if your goals are important enough, this will be important to you as well.
With everything money, life happens. There will be obstacles, no doubt. Things break down and it costs you money. The stock market has a massive correction and your 401k is down 20%.
Adapt and move on. Nothing is stagnant and you shouldn’t be either. Especially with important goals. Meet with an advisor. Modify an intermediate plan to what’s reasonable. Increase your income. There are usually options out there if you look for them.
Just don’t let things go forward without reviewing your progress or you may come back too late and find your progress isn’t exactly where you thought it would be!
As you can see, great goals are well-defined and really focused. They’re in line with your values and what’s important to you. And it’s literally baby steps along the way, one bite at a time.
The Benefits of Having a Plan
The majority of Americans don’t have a great (if any) financial plan. At the most, they have a generic idea of what they hope happens with no real details on how to get there.
As we all know, a life of intent doesn’t just happen. We have to have input and create a plan otherwise it’s just left to chance.
Remember, having solid, measurable financial plans can literally change our destiny. They can certainly affect us for good or for ill.
Without a plan, most people live life and don’t make saving and investing a priority because they live for the moment. But financially speaking the rewards of a great plan take years to culminate into something great. Things don’t happen overnight.
Left to themselves, people can find themselves in their 40s or 50s before really thinking about the future. By then it’s much harder to change habits and build a financial future. It’s not impossible, but it will take much more discipline and dedication.
However, by making a plan you’ll not only develop focus, but you’ll be able to:
- Reach goals quicker and see results sooner. You’ll have your objectives broken down into “chapters” to be met. You’ll be able to change things along the way (even if it’s the smallest adjustments) to get yourself back on course.
- Build momentum as one goal after another is achieved. As I said, when you’re derailed at points (because life often throws us curve-balls), you’ll be able to re-evaluate your strategies so your ultimate goal bears fruit. However, having one small win after another builds energy.
- This energy and momentum will keep you motivated. Talk about having a sense of hope vs despair when it comes to the later parts of your financial work life! Imagine having enough so you could choose when to retire instead of being forced to continue working long past that retirement date (trust me, it happens frequently!).
- You’ll have more gratitude in your life. Don’t believe me? Give it a try. When you have a great plan that is working out you feel better about life. Even if your plan is one where you have to have course corrections you will feel more in control of your destiny which in turn translates into being thankful.
There have been studies that have shown how debt and struggling with money can lead to anxiety and depression. And as we all know, this is a slippery slide. The further into financial problems you sink into the harder it is to pull yourself out of.
I was listening to a video today concerning an interview with a 69-year-old gentleman. He was a man of humble means. Meaning, he didn’t inherit any wealth
nor did he happen to pick the latest one great stock that built any fortune.
Rather he lived like probably the rest of us do. One paycheck at a time. He never made a large amount of income in any one year. But he had a plan. He invested in the stock market as well as real estate. He built up an annuity and had a large cash emergency fund. At this stage in his life he was worth over 3 million dollars.
So, plan for the finer things in life. Develop and implement a plan specific to your situation. Feel free to expand and change the plan as needed. With a solid strategy behind you, your odds of reaching financial success are certainly more in your favor.
Live well, my friends…
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