I used to detest setting financial goals. They always had a negative implication because they served as a stark reminder of my financial inadequacy.
Morningstar’s director of personal finance, Christine Benz, gave me a reality check. “You know how it is when you don’t start a day with a to-do list. You get buffeted around by whatever comes up: phone calls, answering emails, chatting with colleagues. Managing your finances without first articulating your near- and long-term goals is pretty similar. The days will go by, and you’ll find plenty of ways to spend your money. But you won’t get to where you really wanted to go.”
You won’t get where you really wanted to go. That’s when it hit me!! I was approaching it the wrong way. The problem was not with my goals, the problem was with my narrative around those goals. What do I mean? Sometime back, I decided to increase the amount I save and invest. And these were the thoughts that came to my mind.
- It’s a drag (I know what I am giving up, but for what?).
- It’s a loss (I can’t get the gratification I want now).
- It’s a sacrifice (I have to rein in my spending).
Can you sense the negative vibe? The moment you associate something with sacrifice, the motivation dips. You inadvertently insert mental and emotional roadblocks in your own path. The trick is in turning the whole thing around to think about what it is I passionately want to materialise in my life. Then the apparent sacrifice is not punitive, all it requires me to do is readjust my frame of reference. Now, let’s make this practical.
In 1981, consultant and former director of corporate planning for Washington Water Power Company, George T. Doran, published a paper titled, There’s a SMART Way to Write Management’s Goals and Objectives, where he introduced SMART goals. SMART is an acronym that stands for a Specific, Measurable, Attainable, Realistic, and Time-bound strategy. Here’s how to put it into action.
To get motivated, you need to be clear on what exactly you want your money to do for you. Would you rather have an apple cake, or a moist apple cake spiced with cinnamon? Would you rather have a chocolate cake, or Belgian dark chocolate cake? Would you like a black coffee, or a strong espresso made from roasted Arabica beans?
To make your goal attainable, make it vivid. Let’s say that my goal is saving for a holiday. The more I save, the more I have for my holiday. Simple, but vague. It’s okay to start with ambiguous, but ensure you get specific. There are two travel plans that get me excited. Seeing the Northern Lights and going on a safari to Africa and doubling it up with a hot air balloon ride. Now I can focus on the logistics and the amount needed. Forcing detail into the picture propels one to action.
Apply this to any goal, retirement for instance. What do you think your life in retirement will look like? Where do you plan to live? What will your home look like? How do you see your travel plans? What social life do you envisage? How will your regular day play out?
You must have a clear idea of what success is. It would be foolish of me to assume that my dream vacation will cost me Rs 4 lakh. I will have to check what the various safari tour operators offer and the cost of the packages. I will also have to budget for airline ticket, visa cost, and overseas medical insurance, before coming up with a realistic number. And, of course, the wild card is inflation. Same with retirement or saving for your child’s marriage or education. What is a realistic amount after taking inflation into account?
Nothing is written in stone, and if you are willing to adjust your expectations, a lot more is achievable. The one package that caught my attention was around $8,000 to South Africa. So around Rs 5.87 lakh would be just the safari cost. My first instinct was to let go of my dream. That is why a framework like this helps, as you are forced to rationalise and adapt. Did I have to go to South Africa, which is known to be more expensive than Kenya or Tanzania? The above tour was a private expedition. There was no need to opt for it either. Also, it was around 10 days, when a safari can be done in a shorter time frame. There were plenty of economical options once I decided to be flexible.
The same is true for retirement. Maybe you will have to work for a few years longer. Maybe you will have to look at a consultancy or part-time job when you retire. Maybe you have to live in a smaller house (does your villa have to be 3,000 sq ft?). Are you certain of living in an expensive city like Mumbai? If yes, would you be open to selling your 3-bedroom apartment (now that the kids have homes of their own) and willing to relocate to a 1-bedroom?
This is the most difficult. When you have a dream, you don’t want to be realistic. When you get too pragmatic, you can’t realise your dream. A double-income couple with no dependents may have no problem in saving Rs 24 lakh within a year. But another double-income couple with dependent parents and a child, may struggle to do this.
Here is the question I posed to myself: Based on my monthly income and expenses, what are the discretionary funds that I can contribute to this goal? Using that as a broad guide helps stay within one’s boundaries. Also, I am hell-bent on being debt-free, so there is no way I am going to finance my trip using my credit card or taking a personal loan. If it is not possible to pay for it with zero debt, I scale down dramatically on what I expect or simply start living frugally to accummulate more funds. Know yourself and use that knowledge to get clarity and direction.
I had initially set my goal for 2022. However, due to medical reasons, I had no choice but to push it to 24 months.
Your clearly defined timeline depends on what is convenient for you. Remember, at no point of time are we just saving for one goal. Saving for retirement (long-term goal), along with saving for a holiday (very short-term goal), along with child’s education (medium-term goal), and so on and so forth. Numerous goals clamour for our attention and capital. I have the retirement goal running parallel with this holiday goal. And there is no way I am going to start saving less for retirement just to achieve this travel goal. This means I have to increase my savings (by cutting down on expenses) or push the date of the holiday.
I hark back to the first point. Saving requires sacrifice, and sacrifice can be easier when you know what you’re really saving for. The question is, what can you trade today (that is, live without) to get what you want?
Finally, all parts of our lives overextend and draw from the other. But the framework provided by SMART goals does help in pushing up our chances of success. Also, quantifying the goal in terms of the amount and tenure helps dictate the asset allocation. For instance, if the goal is just 24 months away, it cannot be an all-equity investment. But it can be if the goal is retirement which is over a decade away.
If you want to be intentional in what your money offers, you need to get clarity on your goals. The days are long, but the years are short. Make your money work for you.
The author is an Investment Specialist at Morningstar India