This blog post is a continuation of a series on setting goals. Before reading this post, make sure to read Setting Goals: Part 1.
Qualify, Quantify, and Be as Specific as Possible
If you have a daughter, one of your goals may be to provide funding for her college education. But what does that mean? Does funding her college mean tuition, fees, and books only? Will she live at home while in school? Will you buy her a house in Cambridge if she gets accepted to Harvard, and do you plan to float her generous allowance checks every month so she’s not as broke as you were when you were in school? Will she go to a private school or a state university? Will you foot the bill all the way through graduate school or just the first four years? There are many questions that have to be answered before you can qualify and quantify your goal of putting your child through school.
My siblings and I knew that our parents would pay the cost of tuition, books, room, and board for four years at a Texas public university. If we decided to attend a more expensive college, we would need to arrange financing for the additional cost. We knew they wouldn’t pay for our cars, gas, insurance or “walking around money.” Of course, things changed for each sibling when we came to our collegiate years (especially with me) but my parents had a base plan in place with savings. In the near future, I would like to plan on providing the same benefits for my children.
With these facts spelled out, my goal of financing my future children’s education becomes qualified, and with a little research into current costs and an assumed rate to project college cost increases, I can quantify that goal. Now the amount that I need to put aside in my financial plan is a simple math problem. Admittedly, some things (probably many things) may change between now and the time that my children graduate from college. The costs may increase faster than projected, my investments may achieve a higher than anticipated rate of return, one of them could land a full-ride scholarship or one could opt for a low-cost trade school. But, with the plan in place, I’m ready to face the reality that I am most likely to meet and will be able to make minor adjustments along the way as conditions change.
Goals are such powerful motivators that they are helpful even when they are set in an unsophisticated manner. Some people try to simplify goal setting by coming up with a number and saving for this arbitrary dollar amount. For example, a couple might decide to put aside $20,000 for their oldest daughter’s college education. If they are comfortable putting their money into investments, they might open an account into which they deposit $200 each month. Even if it causes financial strain on the family to take this money from monthly cash flows, they may find themselves determined to save that amount. It is hard for me to think of how they may have come up with the numbers $20,000 and $200/month, but they are better off having set the goal and consistently trying to meet it. Even if the stock market gives them a wild ride, they will have something put away to help pay for the college expenses when they face it.
A specific goal, an amount, a date, and a plan are needed to motivate most people to consistently make sacrifices. As a financial planner, I would have also encouraged their education goal to be based on thoughtful calculations rather than conjecture and ensured that the investments better match the time horizon and priority level of the goal. If the couple mentioned above had better qualified and quantified goals and followed a more refined investment strategy, they would be likely to experience less financial and emotional heartache and earn better returns. However, just having a goal, a number, and a date in mind places them on the path to a measure of success because it motivates the sacrifices involved with setting funds aside for future use. Any rigorously executed plan is likely to lead to some success.
Goals are most useful when they are written down, qualified and quantified. They should be as specific as possible with regard to both time and money. For example, a person saving for retirement may say that she wants to retire at 65 and maintain her current standard of living throughout retirement. However, when she hits age 65, how long will she need income? We might be talking about ten years or forty years. That’s something we can’t possibly know. But if it’s a goal to finance a certain standard of living until she dies, she needs to be financially prepared in case she lives an extraordinarily long time. Planning ahead for events that will occur some time but not at certain times requires you to plan flexibly. However, the more detailed information you have regarding your financial goals, the better you can plan for the varying fortunes of life. The next section contains some examples of how a general financial goal can be better defined for this purpose.
Some Examples of Properly Setting Goals
1. Under-defined: “I want to retire when I’m 60 and travel.”
More useful: “I want to retire completely, beginning on my 60th birthday with enough money to maintain the same standard of living that I will have enjoyed in the year prior to my retirement, living in the same house. I also want enough to enable me to travel each year. My annual travel plans can be funded with $7,000 at today’s costs.”
2. Under-defined: “I want to pay for my child’s college education.” I’ve already covered this one, but since it’s one of the most popular goals among parents, I thought I’d list it here.
More useful: “I want to pay the costs of tuition, fees, room and board, books, transportation, and a monthly allowance of the equivalent of $400 per month in today’s dollars for my child to attend four years of college at Notre Dame University beginning in August of 2025.”
3. Under-defined: “I want to leave each of my kids some money.”
More useful: “I want to maximize the value of the inheritance that my descendants receive from the assets left over after I die. I would like this property distributed to them as soon as possible with a minimum number of restrictions.”
4. Under-defined: “I want to be able to buy a boat in 5 years.
More useful: “I want to be able to pay cash for a boat in five years that today would cost $15,000. Additional costs of owning the boat will be paid from cash flows as they arise.”
5. Under-defined: “I want to pay for my daughter’s wedding.”
More useful: “I want to be in a position to pay up to $10,000 toward my daughter’s wedding, which could occur as soon as next year, without liquidating any long-term investments.”
6. Under-defined: “I want to be sure that my family is well taken care of in the event of my death.”
More useful: “If I die, I want my survivors to be able to pay all of my debts, taxes, administration costs, and expenses of last illness right away and to have enough money leftover to give them the same standard of living that we had planned while I was alive. I would also like to fully fund the kids’ college funds, my spouse’s retirement and a one year emergency reserve.”
7. Under-defined: “I want to endow a scholarship to Texas Tech University.”
More useful: “At my death, I want to donate $100,000 to Texas Tech University’s general scholarship fund to endow a scholarship to pay 4% of the value of the fund annually to one student selected by the College of Human Sciences’ scholarship committee. The student must be majoring in Personal Financial Planning and have demonstrated financial need, with preference given to students over the age of thirty who are parents.”
8. Under-defined: “I want my son to take over my business when I retire.”
More useful: “I want my son to be able to purchase my ownership interest in my business at my retirement for the fair market value of the business at that time with a down payment of 10%. I want the remainder to be financed from revenues of the business with a 120-month installment note bearing a simple interest rate of 6% per year.
9. Under-defined: “I want to earn a good rate of return on my investments.”
More useful: “I want to maximize the expected after-tax rate of return on my investments given my level of risk tolerance, risk capacity, personal tax situation, time horizons and other constraints.
10. Under-defined: “I want to set aside an adequate emergency fund.”
More useful: “I would like to maintain an emergency fund invested in liquid investments that would enable me to pay six months’ worth of expenses.”