The base of your financial planning should be your goals and objectives. Goals are basically a result or achievement toward which you are willing to expend time and effort. Goals vary with the individual’s wishes; hence, you set your own. Defining effective goals requires developing some particular characteristics for those goals. For example, “I want to retire comfortably” is not a well-defined goal. Additional information is required.
A well-defined goal requires the following characteristics:
- Specific– An effective goal is specific in nature. It clearly defines the desired result or achievement in an unambiguous manner.
- Measurable– Goals must be measurable, i.e. you must have a way to determine the attainment of the goal and monitor the process toward goal attainment. Financial goals would be measured in dollars.
- Achievable– Effective goals must be achievable. For example, a goal of playing quarterback for an NFL football team would not be achievable for me given my age, size, and athletic ability. Achievable does not necessarily mean easy. “Stretch” goals requiring significant effort are permissible as long as it is possible to achieve the final goal.
- Relevant– Goals must be relevant; a relevant goal provides incentive for expending the effort required for goal attainment.
- Priority– Most individuals will have multiple goals as they go through the goal setting process. Some goals will be more important to the individual than others. Therefore, goals should be ranked by priority. Which goals are most important and which goals have lesser importance? Identify and rank according to priority.
- Time frames– An effective goal has associated time frames for completion and “mile posts” to monitor progress toward goal achievement.
- Action Items– Action items outline the actions necessary to attain the goal. What needs to be done in order to successfully reach the goal?
Let’s restate our retirement goal according to these parameters.
“My first priority is to retire in 30 years at an income level equal to 85% of my current income adjusted for inflation at 3% per year. In order to accomplish this goal, I need to save X dollars per year and my investment portfolio needs to grow at Y % per year.”
- This restatement clearly provides better definition with the characteristics discussed above.
- Specific/Measurable- “…retire… at an income level equal to 85% of my current income adjusted for inflation at 3% per year.”
- Achievable- certainly.
- Relevant/Priority- “…first…”
- Time frame- “… in 30 years…” with measurable mile posts—the value of the portfolio each year based on an assumed savings rate and portfolio appreciation rate can be identified and monitored.
- Action Items- “… save X dollars per year.”
We at Paragon Financial Advisors help our clients appropriately define, and attain, their financial goals. Please give us a call and we’ll help you. Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX. We offer financial planning and investment management services to our clients.