For my own journey towards financial freedom setting goals has been an important factor in helping me get to where I am currently. It also continues to be a source of motivation for me to continue working towards my dream. In this post I’d like to share with you my own goal setting framework and provide some examples of how I’ve used it along my journey towards financial freedom.
Here’s what the framework looks like:
Set
This stage is about setting a goal, so for me, it is about dreaming of and defining what I want. In addition to this I find that it’s important to think about the reasons why I want to achieve the goal; and how working towards the goal will make me feel. I find that having a reason why I want to do something is huge source of intrinsic motivation. As an example: I want to achieve financial independence so that I have the freedom to choose how I spend my time.
This part is also about defining what success looks like. So, with financial independence it is the point where passive income exceeds cost of living. If possible, I like to put some numbers to the goal to make it more specific and measurable. When I first came up with the goal of achieving financial freedom, I thought that I needed $50,000 of passive income which could be achieved with a $1m portfolio. On a side note I was in high school at the time and term deposits were paying 5%, but I have no idea where the $50,000 cost of living came from.
Assess
Once the dreaming is over, it’s time to assess how close/far I am from achieving the goal. When I first came up with my financial independence goal, I was in high school, so I was starting from zero. This meant that there was a huge list of things that needed to be achieved to get to where I wanted to go.
Plan
The next phase is the planning phase which, for a goal as large and long-term as financial independence, involves a division into many smaller short-term goals. In addition to this, those smaller goals may need to be further broken down to point where specific actions can be created. One consideration for determining if the goals are broken down far enough is whether or not the actions/habits generated by the goals can be repeated on a daily, weekly or at, most monthly frequency. At the time, my financial freedom sub goals looked something like this:
- Get a formal qualification
- Get a job
- Save money
- Invest
If we take the “Get a formal qualification” sub goal as an example it must be broken further because it’s difficult to create actionable habits from it. So breaking down the goal further would look like this:
- Find out what subjects are required to get into engineering
- Finish high school with an A grade average
- Complete university
- Complete an engineering related vacation work stint whilst at university
Once the goals are broken down to a point where I am satisfied, I’ll then try to develop routines/habits that will give me a good chance of achieving the broken-down goals. For example, if we take completing university as an example the routines/habits that would be put in place would include:
- Attend classes in person
- Do the required reading once I get home every day
- Study on Saturday morning
- Do the tutorial exercises after the tutorial
- Take notes instead of sleeping during lectures
For me, I find that when I have a plethora of choices of how my effort can be spent, I tend to choose the lazy option i.e. watching TV. So, I find that I am more likely to do the work if I plan to do it in a regimented or habitual way.
Do
This is stage is about trying to execute the plan. As mentioned earlier I find that if I make something a habit then it takes less perceived effort for me complete. This phase is also about enjoying the process and remembering the reason why I am trying to achieve the goal.
Measure
Measuring progress involves taking a looking how I’m progressing with my smaller goals. At the current stage of my financial freedom journey one of the most important goals is investing 50-60% of our take home income yearly whilst still maintaining enough cash to satisfy our requirements. This makes it important to periodically track our cash flows to see if we are achieving this goal monthly, quarterly and yearly.
Once information is measured it allows the goal to be re-assessed and/or restructured if required. Back to the example of needing $50,000 of passive income to be financially independent after tracking our expenses and looking at safe withdrawal rates we actually find that a $60,000 per year passive income and a 4% withdrawal rate would be more appropriate, which puts portfolio equity requirements at $1.5m.
Measuring goal progress often results in obtaining new information which means that goals need to re-assessed and re-defined. Since the world is a very dynamic place this is perfectly fine, as long as you avoid downgrading your goals because you didn’t have a valid reason why your plan could not be executed.
Rinse and repeat
Essentially, once this is all done, I just rinse and repeat until my goals are achieved. It’s important to mention that I don’t always achieve my goals but I’ll usually get pretty close. I feel a lot more satisfaction when I aim high and miss by a little as opposed to when I don’t aim at all – as mentioned earlier it often results in me achieving nothing.
Something I’ve learnt over the years is that it’s very important to remember that while working towards achieving your goals you need to learn to enjoy the journey. This means not defining your happiness by either success or failure. I’ll reiterate now that the reason why you are doing something is crucially important to setting a goal and remaining focused along on the journey.
Concluding thoughts
Setting goals has helped to give my finances direction of the years and will continue to do so going forward. In addition to this, I believe that if I didn’t have my financial goals to work towards, I would have fallen victim to the billion-dollar marketing machine the encourages us to be mindless consumers, which would put me in a place of vastly decreased life satisfaction.
I hope that this framework has helped you with your own goal setting, or, encouraged you to do some goal setting yourself.
Engineer your freedom