As the year wraps up and the new one approaches, it is common to see everyone setting their annual goals. While there are always some goals that each one of us wants to achieve – for e.g., financial goals may include earn more, save more, invest and grow nest egg more etc, I want to take this time to reflect on some things to keep in mind when setting financial goals.
Goal setting can be a great way to achieve success in life. Of course there are exceptions to the rule – and depends on each individual’s commitment, personality, ability and other uncontrollable circumstances. But something that is highlighted a lot in media is to set SMART goals. SMART is a mnemonic acronym standing for Specific, Measurable, Attainable, Realistic, and Time-related. A lot has been written about SMART goals and I will not try to repeat things here – but I encourage you to read up and think about this as a goal setting measure.
Setting Financial Goals
An important aspect of goal setting is not to set overarching goals that are unrealistic and unachievable in the time-frame. For e.g., if you are not able max out your retirement account, dont set a goal to try and max out your account in the new year (unless something drastic changes in your financial situation). A more realistic goal may be to attain say a 5-10% higher contribution amount in the new year while slowly working your way towards reaching the end goal – which could come 2, 3, or 4 years from now.
This blog is a focus on achieving financial independence and at the basic level – its a simple concept: Spend less than you earn and invest for the long haul. How each one of us does this is up to our personal choices. Some may choose to go the frugality route – to cut down on the expenses. Some choose to simply focus on looking to grow income by going the side-hustle route. Either method will work fine, as long as you spend less than you earn and invest. Simply treat yourself as a corporate entity.
Treat Yourself as a Corporation
At the heart of matter, what are investors looking for in companies? A company that is growing perpetually and sharing those increasing profits with the investors.
- Revenue Growth: A company that sees revenue growth is doing better and increasing market share. We can choose to increase our revenue by: asking for a raise; picking up extra work if available; start or increase side hustles etc.
- Expenses: Controlling expenses is key to any business/individual. Control expenses by cutting down on discretionary spending, tweak finances to reduce taxes, keep a check on lifestyle inflation. This is one of the main keys on the path to financial independence.
- Capital Expenditure (Capex): Invest for the future to achieve better revenue/earnings. This can take various forms – investing to grow the nest egg, taking courses & spending time to learn, looking for small incremental improvements on a regular basis.
- Debt: Debt can be a great tool to fuel growth. Companies always need access to credit markets to grow their business and the same goes for individuals. There is a time for taking on more debt and there is a time to cut down on debt. Always pay down high interest debt and use debt only on appreciating assets.
- Earnings Growth: Earnings are the underlying profits. These are the leftover profits after expenses, capex, taxes, debt repayments etc. The goal is to grow this steadily on a regular basis.
- Reward: Companies reward shareholders via dividends and/or share buybacks. Be sure to enjoy the fruits of the hard work
- Review Regularly: Companies review on a quarterly basis and share outlook. Same should go for individuals – review where things stand on a regular (monthly? quarterly? semi-annually?) basis and tweak things accordingly. Setting a goal at the beginning of the year does not mean its set in stone – circumstances change all the time; tweak to change it a bit anytime as long as steady progress is achieved.
Have you set your goals yet? I am working on finalizing my blog post on the goals for 2016 and will be sharing the details soon. What are your thoughts on the points made here in this post? Be sure to send your feedback using the comments section below.
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