The three benefits of having clear financial goals

I met with new clients recently, and they said we didn’t need to go through the goals part because they just wanted to “make the most of their money”.

That’s great, but having goals is a good way to focus attention on the things that are important. It forces us to create a vision of how we would like our life to be.

Research by Dr Gail Matthews, a psychology professor, showed that writing down your goals made you 42 percent more likely to achieve them. Why? She put it down to three factors. Clarity, accountability, and memory.

When you write them down, it makes you think about them in detail. A good framework for considering your goals is to use S.M.A.R.T. Specific, Measurable, Achievable, Relevant, and Time-Bound.

 Specific – Make it very clear to make it more effective.

Measurable – Have clear milestones so you can track your progress.

Achievable – If it is unrealistic, you will end up giving up.

Relevant – Make sure the goals are yours. Live your ideal life, not one that you think others would expect you to do.

Time-based – Set yourself time limits. It helps you focus.

When I asked why they wanted to make the most of their money, they said they wanted to be financially independent. However, they didn’t know what that meant, they couldn’t articulate it.

As background, they are a 40-year-old couple, earning a combined income after tax of $246,000 per year. They own their own home, have two kids, 12 and 16, both going to private school. Their current expenses are $185,000, although they expect this to fall to $110,000 in the next 10 years. They have $600,000 in their super and a share portfolio of $120,000.

They would both like to be able to stop work in the next 15 years. To do this they want a passive income equivalent to $110,000 in today’s dollars for the rest of their life.

We started by working backwards. To have a passive income of $110,000 for the rest of their life, we calculated they would need around $4 million invested (this includes their super) by the time they are 55.

Using a rate of return on their investments of 7% after tax, we calculate that on top of their compulsory employer’s super contribution, they need to save and invest the equivalent of $50,500 per year for the next 15 years to achieve their goal.

We bought this all together as the following goal:

To be financially independent and be able to stop work by the time we are 55 we need to have $4m in invested assets. Each year we will save and invest an additional $50,500 (increasing this at the rate of inflation) on top of our employer super contributions.

In 5 years, our investments should be worth $1.45 million. In 10 years, they should be worth $2.5 million and in 15 years we will be financially independent.

Specific – Yes, they know exactly what they need to do.

Measurable – Yes, they have milestones along the way.

Achievable – Yes, they earn $246,000 and spend $185,000. They have the money to invest $50,500 a year, plus some for other goals if they wish.

Relevant – Yes, this is their goal.

Time-based – Yes, there are timeframes involved.

As their financial advisers, it is now our job to help them choose the investments, decide whether to invest inside or outside of super, minimise tax along the way, and more importantly to keep them on track.

Financial independence is more achievable than most people think, you just have to know what it means to you. The two biggest reasons people don’t achieve it are they don’t have a plan to do it and they get sidetracked.

We specialise in working with professionals to help them achieve financial independence. If you are looking for an independent financial adviser to help you, book a chat via the button below or contact us at team@constructwealth.com.au.