Financial goal setting sounds terribly boring. And requires a fair amount of dedicated thought. Have you ever wondered why we need to set a goal? Why can’t we just keep saving? After all, amassing wealth is a fair goal. One that most of us, if not all, would have on our minds.
Here’s why.
There is always a story that runs parallel to the numbers. Work with the story first, the numbers will adapt. You need the answer the “why” to be able to inculcate the discipline in spending and saving.
Billionaire Mark Cuban has something interesting to say about this.
He lived a frugal life when he was young. He had five roommates in an apartment with 3 beds. He slept on the couch or the floor. He worked as a bartender and gave dance classes. He lived off of macaroni and cheese, and mustard and ketchup sandwiches. He drove a cheap car. But his frugality was a conscious decision. He was determined to save money to “be able to travel, have fun, and party like a rock star.”
Money is transactional. It is an inanimate object with no power of its own. It is a neutral resource full of possibilities. It is not the money that will give you satisfaction, it is what can be purchased with it. Be it status or security. You may want to use money to buy you a house. Or, leave an inheritance for your children. You may want it to donate to charity. Or you just need it to feel secure.
If you don’t have a why, you won’t have much motivation or discipline to save.
Clarity on a goal helps with measurable behaviour.
It is amazing the sharp focus that comes into play once you give yourself a target. The sacrifice you are willing to make to get there.
Someone with a callous financial attitude who just wants 4 walls (goal for a house) or something that moves (goal for a vehicle) will lack the path to get anywhere simply because there is no clarity of vision.
Do you want to travel extensively? Do you want to leave a substantial inheritance for your children? Do you want to buy a villa in Goa? Do you want to relocate to another country for retirement? If you do not articulate what on earth you are saving for, you will never be able to comprehend whether or not you are on track. You may need to acquire a kitty of Rs 2 crore to fulfil your dream of a global holiday every single year for 15 years, post retirement. But your savings pattern and investment strategy may be on track for just a kitty of Rs 50 lakh.
When you focus on the outcome, you are prompted to reframe your goals in terms of their emotional and personal value.
Morningstar’s behavioural finance team in Chicago conducted some interesting research last year. They found that investors asked about their goals were pretty influenced by what they were thinking about at that moment.
At the start, individuals were told to list their top investing goals. Then they were asked to review a list of goals other investors have and then reselect their top goals, drawing from their initial list and the list common goals.
When that happened, individuals considered stuff that they did not do so earlier. Most of them ending up changing at least one of their priority goals.
For example, an individual might have just seen Instagram photos of a friend’s vacation in Italy. At that time, if he was asked about his long-term goal, the response might be: "I'd like to take exciting vacations." In reality, travel may be low on his list of priorities.
To truly understand your goal, play around with it in your mind. For example, let’s say the goal is saving for retirement. Dig deeper. What exactly is the trigger?
Here are some possibilities:
- I do not want to be a financial burden to my children as I grow older.
- I do not have children, and a huge bank balance will make me feel secure.
- I want to relocate and so need a huge amount to set up a new base.
- I want to retire early cause I hate working.
- I want to leave a substantial inheritance for my children.
- On retiring, I want to volunteer regularly and donate to charity.
- Once I retire, I want to travel abroad every single year.
- I just want to feel rich. Actually, I want to be richer than my siblings.
Similarly, ask yourself why you want to travel? Is it because your family does? Is it only to visit your children abroad or do you want to explore other lands? Is it a status symbol? Once you get sincere and honest about what you want and why, you will get tremendous clarity on the amount you need to save, and will also have an amazing trigger to do so.
And yes, don’t judge yourself harshly. There is no right or wrong.
Investment Involves Risk of Loss.