Welcome to part 2 of the ‘How to create a financial plan’ series. In this series of articles, we take you through 4 simple steps to put together your own financial plan. These steps are:
- Assess your current Financial Situation
- Develop SMART Financial goals
- Determine your Strategy
- Review your Plan
In part 1 of this series, we took the first step in creating our financial plan by Assessing our financial situation, which means we now know our Net Worth, Cash Flow and Savings rate. If you’re yet to calculate these please do so by filling in this spreadsheet before moving on.
In this episode of the series, we will be discussing how to develop SMART financial goals that’ll help you achieve your dream life.
Tony Robbins, one of the most famous American Life coaches once said that ‘Setting goals is the first step to turn the invisible into the visible’. This is a powerful statement because as young ambitious people (as a DailyKobo reader, I know you are!), we face a hugely uncertain future. But as unpredictable as the future is, we can take steps to shape it by setting goals we hope will help turn our future from being invisible to visible.
There's a common misconception that financial goals are solely about monetary matters e.g. Increase income by 50%. However, personal finance is more personal than it is finance which is why when setting financial goals, we have to take a step back and instead focus on the big picture.
The big picture refers to you understanding your relationship with money, thinking about your values and knowing what you want your lifestyle to be. This is the essence of lifestyle financial planning whereby you focus first on designing your ideal lifestyle then you work backwards and set financial goals that’ll help you achieve this. Some refer to this process as ‘marrying your money to your meaning’.
How do you know what the big picture is? George Kinder, a Certified Financial Planner and the recognised father of the Lifestyle Financial Planning movement, designed three questions to help his clients figure out exactly what the big picture is for them. These three questions are:
- Imagine that you are financially secure, that you have enough money to take care of your needs, now and in the future. The question is, how would you live your life? What would you do with the money? Would you change anything? Let yourself go. Don’t hold back your dreams. Describe a life that is complete, that is richly yours.
- This time you visit your doctor who tells you that you have only 5 – 10 years left to live. The good news is that you won’t ever feel sick. The bad news is that you will have no notice of the moment of your death. What will you do in the years you have remaining? Will you change your life and how will you do it?
- This time your doctor shocks you with the news that you have only one day left to live. Notice what feelings arise as you confront your very real mortality. Reflecting on your life, on all your accomplishments as well as on all the things that will remain undone, ask yourself: What did I miss? Who did I not get to be? What did I not get to do?
I recommend answering these questions as detailed and as honestly as you can, don’t forget to note down your answers. These questions are designed to strip back our superficial wants and help us truly determine what our values and priorities in life are.
Some of you might be skeptical about the need for answering these questions, but knowing your end goal or your ‘why’ will make implementing and sticking to your financial goals a lot easier.
For instance, if you need to cut back your spending on clubbing, if you know doing this will help you achieve your bigger goal of retiring by 40 it’ll be a lot easier to stick with it.
Mr Kinder designed a more detailed set of exercises - including the Three Questions above - that will help you dig deeper into determining your dream life. They are completely free to take and can be found at LifePlanning.com.
Once you’ve answered these questions, you should have a clearer picture of your desired lifestyle, values and priorities. You should then begin to reverse engineer what your financial goals should be in order for you to achieve your dream life. This means setting smaller goals that’ll help you achieve your desired lifestyle.
Every financial goal you set should be a SMART goal: Specific, Measurable, Achievable, Relevant, and Time-Framed. The three figures (Net Worth, Cash Flow & Savings rate) we calculated last week will come in handy here. You can either set financial goals based on those figures, or use them as a guide to determine how Achievable the SMART financial goals you’ll set are.
As well as making your goals SMART, you can also define them using these three categories:
Short Term: Less than one year
Mid-Term: One to five years
Long Term: More than five years
For example, let's say that you want to go on a vacation to Hawaii for your honeymoon, and you plan to get married in three years. So, you have 36 months to save for your vacation. You did your research and found that you will need to save at least ₦1 million for the trip which means you will need to set aside roughly ₦28,000 each month until your wedding day. Guess what? You just created a SMART goal! Your goal is:
Specific: You plan to go to Hawaii when you get married
Measurable: You know that you will need to save ₦1,000,000 to take your trip
Achievable: You will need to save ₦28,000 a month to meet your goal
Relevant: Your goal is relevant to you - you plan to take a trip to celebrate a major milestone in your life
Time-Framed: You plan to reach your goal in 3 years
To help you with this process, we made SMART Financial Goals guide you can download here. Also, if you need some inspiration for more financial goals, check out our article on 5 Financial Goals for 2018.
In the next article, we’ll be taking the SMART goals we’ve set and determining a strategy to help us achieve them. If you enjoyed or learned anything from this post, please like it, share it and leave a comment! For more DailyKobo advice, click here to subscribe to our newsletter and don't be afraid to get in touch.