Road map to financial dreams – Part 1

This is part 1 of a 4 part series on creating and achieving our financial dreams. I outline 9 simple steps for doing this. This post details the first 3 steps.

“What is now proved, was once only imagined.” – William Blake

Why do we need money? What do we want to do with money? What do we want to do when we don’t have to concern ourselves with money? What makes you happy?

Dreams and Goals

Dreams are our destinations, our aspirations. The road to wealth starts and ends with a dream. Most budgets fail because we don’t have the motivation to follow through. A lot of saving efforts fail because we don’t know what we are saving for. A dream is a vision that provides us with the motivation to act. The first step to financial discipline is to have a dream, then set up goals: a plan with distinct steps. Can you imagine traveling around the world without a map? If we are saving for the sake of saving, we are just hoarding. Clear financial goals are the means to achieve our dreams. The only way you can bring your dreams to fruition is to have goals that are clear, specific, written, measurable and time bound.

How to set up goals to fulfill your dreams?

Setting up goals need not be a tedious or a long process. Here is an approach that worked for me –

1. Identify your goals.
2. Categorize your goals.
3. Describe each goal in detail. Break each goal into smaller steps if needed. Make each of them a SMART goal.
4. Evaluate your spending pattern and align it with your goals.
5. Put your goals on autopilot
6. Create a plan to review your progress.
7. Leave room for shifting priorities.
8. Be accountable to yourself.
9. Keep going

What do you dream about? A nice retirement? A beach house? A relaxing vacation in an exotic destination? Quit your job and volunteer full time? May be a luxury car? Or perhaps all of these

1. Identify your goals – Translate your dreams into goals.

If you dream about living in a beach house, the first step to living that dream would be to save for a down payment. Write that down. If you want a nice vacation, the plan would be to start putting money away for the expenses of that dream vacation. If you dream of a cushy retirement, your goal should be to amass a sizable nest egg. Translate each of your dreams into one or more goals. The goals will look like –

1. Save for a down payment
2. Have a sizable nest egg
3. Eliminate credit card debt
4. Save money for a Caribbean cruise
5. Save enough money to buy a car
6. Build an emergency fund
7. Donate to charitable causes

2. Categorize your goals

Based on the time horizon, categorize each goal into ongoing, short (<2 yrs), medium (2-5 yrs) or long term goal (>5 yrs). For example, if you want to pay off your credit card debt as soon as possible, that will be a short term goal. Whereas if you want to buy a house in another 4 yrs, your medium term goal would be to save 20% for a down payment in another 4 yrs. Categorizing all the goals –

• Ongoing
  Donate to charitable causes
• Short term
  Get out of credit card debt
  Build an emergency fund
  Save money for a Caribbean cruise
• Medium term
  Save enough money to buy a car
  Save for a down payment
• Long term
  Have a sizable nest egg

3. Describe each goal in detail. Break each goal into smaller steps if needed. Make each of them a SMART goal.

What is a SMART goal? A SMART goal should be Specific, Measurable, Attainable, Relevant and Time-bound. For each goal, add as much detail as possible. How much will it cost? How much do you already have? What is the target date? Be as specific as possible and break down long term goals into smaller steps. For example, a SMART way to set our top short term goal, pay off the credit card debt is:

I will pay off the balance of $2000 in my Visa card and $3000 in my Master card, by December 2011.
Details : Visa card – Minimum payment : $200 per month; Interest rate : 18%
Master card – Minimum payment : $300 per month; Interest rate: 15%

SMART version of our goals

• Ongoing
  I will donate 10% of my income to charitable causes that match my values.
• Short term
  I will pay off the balance of $2000 in my Visa card and $3000 in my Master card, by December 2011.
  I want to have an emergency fund that will cover 3 months worth of my expenses (specify the amount based on your spending). I already have enough to cover one month. I want to have this fully funded by the end of this year.
  I want to save $2500 for the Caribbean cruise by August of 2011.
• Medium Term
  I want to buy a 2006 model Honda Accord. I am planning to buy the car in the summer of 2012. I will need $7000 for that (do your research on what you want to buy and set a realistic goal).
  I want to buy a 3 bedroom house with a nice sized yard in the suburbs of Awesometown by 2013. The average price for a 3 bedroom single family home in Awesometown is $300000. I will need a down payment of $60000 by the end of 2013 (Again do some research on what you want. Don’t stress about getting it perfect. But be conservative in what you can buy and have an estimate on how much you will need). For example:  I already have $15000 saved for this purpose.
• Long Term
  I will need $3 million for me to retire at 60 and maintain my current lifestyle ( you can get an estimate of how much you need for retirement in almost any brokerage website or finance websites. Here are 2 such calculators Fidelity - http://personal.fidelity.com/planning/retirement/retirement_planning.shtml.cvsr?refpr=guid02  and CNNMoney – http://cgi.money.cnn.com/tools/retirementneed/retirementneed_plain.html ). To achieve this target amount, I will contribute the max to my 401k and ROTH IRA every year.

Summary of our SMART goals

We have completed our goal setting. Now that we have a clear vision on what we want to do, we will continue to work on how we are going to achieve the goals and realize our dreams in the remaining parts of this series!

Tagged as: financial dreams, financial goals, SMART