Goals are important. In the next few blogs, we’re going to focus on setting them in the context of our timeline, so that we can be thinking about them in the right terms and of course, so that we can take action to meet them.
Everything You Need to KNOW
1. Goals Should be Mike Tango
You’ve heard of SMART goals, right? You know the score, goals should be Specific, Measurable, Achievable, Realistic and Time-bound. Other variations also can be found if you want to push your way through the murky depths of corporate-speak.
While SMART makes for a nice acronym, I reckon it’s a lot of wasted breath and that we should shorten things to be just MT, measurable and time-bound. After all, if a goal is MT, then it is by definition specific.
And if it’s Achievable, then it’s also Realistic, and vice versa, so that just seems superfluous. If we set ourselves a goal which isn’t achievable then who are we fooling? Our goals should also make us excited.
2. Financial Goals Should be Monetary
For our goals to be measurable we need to put figures on them, and that means pounds and pence. We covered this briefly in the last chapter, when talking about general expenses and adding those to our timeline, but now we need to do a similar exercise for our goals.
Now it might be more or less easy to put a monetary figure on a particular goal. If it’s a purchase, then it’s fairly straightforward. If the camper van you want is £30,000 then that’s an easy goal to articulate. But if your goal is to take a year off work and travel, then you need to work out both the loss of earnings for the year, and also the cost of the travel, so there’s a bit more work involved. Then there’s the big one, the ultimate goal for many of us – FI (financial independence).
There’s no correct formula for this, but I’m going to revert to the most popular one, which is to multiply our desired lifestyle cost by 25. To put it another way, it’s the amount of money to be able to draw 4% per year endnote run out of money.
Of course, we need to apply inflation to this figure too. A £25,000 per year lifestyle at age 35 will cost more than £25,000 when we’re age 55. And there are potentially two moving targets, both the amount and the timescale are dependent on each other and the inflation factor. But we’ll need to take a stab somewhere and add the goal to our timeline.
3. Inflation is Your Enemy
Inflation is working against you while you’re setting and working towards your goals. It simply makes everything more expensive in the future, and it messes with our head because we can only think in today’s money.
The way to deal with it is to set goals in today’s money, and then apply the inflation factor. But when working out what we need to save, we need to NOT take inflation off the growth rate, because otherwise we’re factoring it in twice.