Thus far you should have set yourself a BHAG and the next step is to break it down into smaller, more attainable goals that you can work towards on an annual or even monthly basis. Now this is entirely dependent on what your BHAG is, so I can’t really go into too many specifics here, but I can explain what kind of short-term goals you should be making.
First of all, any goal you set has to be SMART. This goes for all goals you set yourself in life, not just your financial goals on this journey. A SMART goal stands for the following:
- Specific – a specific goal has a far greater chance of being achieved than a vague goal. An example of a specific goal financially could be to reduce debt by $500 per month for the next 12 months, as opposed to just reducing debt.
- Measurable – a measurable goal should be easy to monitor and determine whether or not you have succeeded (or are succeeding) at reaching the goal. This is pretty easy when it comes to any financial goal since you are working with numbers. However, some goals can be very difficult to measure as they are qualitative. Being an accountant, qualitative information is basically my arch nemesis, so I try to stick to keeping all of my goals quantitative in one way or another. An example of a qualitative goal could be to live worry free financially. See? Useless. Keep it quantitative and specify exactly what amount of money you need in order to live a worry free life.
- Attainable – This is the same as the need for attainability in the BHAG you have set yourself. There is no point in setting a goal that you know you can’t reach, this only demotivates you. Set a goal that is difficult to reach, but has the ability to come true. For example, if you go drinking every Monday, Wednesday and Friday night, don’t set your goal to be sober for the next year. Start with something more realistic, like going out every other Friday. Alright, maybe that’s still unrealistic, you alcoholic!
- Relevant – If your BHAG is to pay off your $500,000 mortgage within 10 years, your short-term goals have to go towards reaching that. Setting yourself the goal of watching every Al Pacino movie this month isn’t really relevant, is it? Stay focused damnit!
- Timely – Every goal should have an end date target, whether it’s next week, next month or next year. Okay maybe you don’t need to set daily goals (even I’m not that anal) but you get my drift. In fact I’m quite a fan of small “stepping stone” goals as they quickly add up to meeting bigger goals. “Look after the pennies and the pounds will look after themselves,” as they say in the homeland. Personally a monthly goal is ample for me, but if you work better by setting yourself weekly or even daily goals, so be it! Do whatever works for you.
Here’s some examples of useless goals vs. SMART goals:
|Useless Goal||SMART Goal|
|Lose weight||Hit the gym 3 times a week and only eat pizza twice a month for the next year.|
|Stop arriving late to work||Get your ass out of bed at 7am every day for the next month and disable the snooze button on your phone. Leave for work 15 minutes earlier than needed to ensure a prompt arrival.|
|Save more money||Put $250 a month into your porcelain piggy for the next year|
There are limitless goals you can think of, just make sure they are SMART.
Continuing our example from the BHAG article, where our goal is to reach $1,000,000 by 2030, here is how we can break it down into more manageable, short-term goals:
This is a very handy investment calculator which you can use for all sorts of calculations (more on this later). I’ve configured the calculator to tell me how much money we need to put into our investment portfolio every month in order to reach $1,000,000 by 2030. As you can see I’ve given a 13 year timeframe, entered our starting principal of $65,000 (how much we have invested approximately right now) and used an estimated average return of 9% per year. This is a high average, but I’ll go into more detail on why I use that in a future post. As you can see, it tells me that in order to reach our BHAG we need to invest $2,793.62 per month into our portfolio, which I’ve assumed to return 9% per year, in order to reach $1,000,000. I could switch the % return to 8% or even 6-7% and the monthly figure would increase drastically. For example, at 8% we’d need to save $3,080 a month.
Currently though, we are not saving anywhere near $2,793 a month, but it is certainly not out of the realm of possibility to average that over the next 13 years, so I’m going with it. We’re young, have our best career years ahead and who knows, with a few pay rises we could certainly get there. Even if we don’t get there, as I pointed out in the BHAG post, just trying to reach it will leave us in a much better financial position than if we didn’t.
In 2016 we managed to save $22,500, or $1,875 per month. Quite a way off our monthly target of $2,793, but hey, what’s the point in setting yourselves goals if you’re already meeting them once they’re set? Now is a time to be ambitious and push ourselves towards bigger and better things! Our 2017 goal is going to be $24,000, which equates to $2,000 per month. Reducing spending by a further $125 is no mean feat as we have already cut our spending in many areas of our life. Also, I never like to assume a pay rise for either of us as we simply don’t know with any certainty what is going to happen, so I’m setting the goal based on no pay rise (or an inflation rise only). If one of us does get a pay rise, then I will likely review the goal at that time.