The secret to defining your ‘real’ financial goal

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hat’s a “real” financial goal, I ask Carl Richards, a certified financial planner and creator of the Sketch Guy, his weekly column in the New York Times. I ask this, rather cynically, after reading that his

book The Behavior Gap, Simple Ways to Stop Doing Dumb

Things with Money can help you identify your “real” financial goals.

Like his sketches, Richards’s answer is elegantly simple: “Real financial goals are those you’ve taken the time to define versus a vague sense of worry. Almost no one has them [real financial goals]. I regularly get e-mails from readers of my column saying: ‘I don’t have goals.’ ”

If we’re honest, the same could be said of many of us. We have a vague end in mind, something we imagine in our future. It may be retirement or being debt-free or taking an overseas holiday, but we’ve not taken the time to define it. For example, an overseas holiday could be anything from a week on a beach in Croatia to one month walking the Camino de Santiago trail. It depends on your interests and budget. Likewise when it comes to retirement. If it’s a “real” financial goal, do you know your retirement date? What kind of lifestyle do you plan to enjoy? And how much money will get you there?

These are not questions we typically get asked by financial advisers. Theirs tend to be along the lines of: do you know how much money you will have at retirement if you continue to save at your current rate? And do you know what kind of lifestyle that will buy you?

Dose of fear

These aren’t bad questions, but they come with a heavy dose of fear. Does it help me to know that only 6% of South Africans can afford to retire? Does it make me tremble? No and no. Yet it’s the stat that’s shoved down our throats during any conversation about retirement.

Instead of trying to scare the daylights out of us, the industry should apply energy to helping us determine our financial goals.

Leon Greyling, the MD of Alexander Forbes Investments, agrees that too little time is dedicated to unpacking a client’s goals, and too much time to analysing the product provider and the provider’s performance.

Richards, who is here as a guest of AFI, is strong on the message that investment performance is not a goal. It’s a key message in a low-return environment, where investors are more prone to making emotional decisions, like firing an adviser or investment manager due to the poor performance of an investment.

Whether your investment performs better than your neighbour’s will have no impact on your ability to send your children to university, to live the retirement lifestyle you want, or leave a legacy for your family, Richards says. “Don’t get me wrong, the rate of return you earn on your investments is important, but only in the context of your family’s goals. Investment performance is the means to the end, not the end in and of itself,” he writes in a blog post.

“Focusing on investment performance as a goal leads to major behavioural mistakes,” he says. Chasing the hot stock, asset class or unit trust fund is the “mother of all behavioural mistakes and is often a direct result of being unclear about the difference between financial goals and investment performance”.

Instead, take the time to clearly define your financial goals, Richards says. Then, build a plan around those goals and focus on doing what you can to control your behaviour. “There are three variables that go into any wealth management plan: time (the amount of time until the goal), savings (the amount you save) and rate of return (the amount you earn on your investments).”

Some control

You have some control over time and savings, and they are the most important, he says. “The amount of time you have until your goal and the amount that you commit to saving will have a far greater impact on your ability to hit your goals than what the market does.”

So what’s the secret to defining your real financial goals? We need to “relax a bit”, says Richards. “Start by guessing. Write it down and then step back and ask yourself: ‘What’s the smallest next step to head in that direction?’ ”