Goals: Helpful or Hurtful?
Everybody, everywhere sets goals. At work, at home, with money, with weight, with success, with projects - you name it, someone has a goal for it. But, is setting goals doing more harm than good?
Now, no one is going to say that setting goals is a bad idea, but maybe they’re not as motivating as you think they are. Evidence suggests that goal setting can be counterproductive, especially when goals aren’t matched up with specific action plans and behavior modification. Despite good intentions, many times we fall short of achieving our goal or when our goals are reached we go back to our old habits. This is especially true when it comes to your personal finances.
One goal may be “I want to save X amount of money for retirement”. Once you reach that goal, then what? Do you stop saving? Or if the goal you have set is a stretch goal, do you get discouraged when you get off track and give up too early? Having a goal may be initially motivating, but it is important to back that up with contingency plans and structures for fulfilling on that goal in order to achieve it.
In regards to your personal finances, many people use the simple wealth formula of Wealth = Money X Rate or Return X Time. But this formula doesn’t take into account planning for contingencies. For example, what happens if the money you have allocated to save is needed for another purpose? Such as replacing the roof on your house or handling an emergency? Do you change the goal, adjust the time or take on more risk to get a higher rate of return? What if the rate of return fluctuates along the way? How do you manage the goal with respect to those fluctuations? And the time element can be tricky as well, because it is one thing that is not always in your control. Given these varying aspects, is it realistic to use this type of formula in planning for your finances? Or would creating good financial behavior and habits be more useful? Habits like:
Protect yourself first. Protecting your most valuable asset, which is your ability to earn income.
Saving at least 15% of your gross income. Failure to save appropriately means you may feel the need to take more risk with your money. This can be avoided if you increase your savings rate to an appropriate level as early as possible.
Building at least 6 months of liquidity to provide you with access to capital when you need it. This allows you to avoid going into debt when you need money. It also helps to keep you consistent with the other long term planning you are engaged in.
Avoid taxable compound interest. Taxes are a big contributor to wealth erosion. Look at strategies to avoid pay unnecessary taxes when possible.
Contribute to retirement. Putting money away for your eventual retirement is important, but there is a lot of life to live between now and retirement. Make sure you are positioning yourself to handle expenditures between then so you can stay on track with saving for retirement.
Stick to the process. When you follow a process or a system, you are better organized to handle contingencies along the way. You want to analyze the most efficient and best use of your money each and every year. Doing this will create more wealth and benefits over time. The result is you will reach your financial potential and feel more secure and confident along the way.
Don’t make managing your money harder than it has to be. Talk to your Leap Professional who can walk you through the process, making your money work for you.