In our Taking Control of Your Wealth series, we begin at the beginning — by helping you to set financial goals. While this may seem obvious, my experience is that many people fail to complete this basic first step. Whether someone is in the midst of a major financial challenge, or sailing along with a comfortable standard of living, goal setting is essential to building long-term wealth.
Even so, there are constraints that you may not be aware of that may be preventing you from making progress. Before establishing your financial goals, let’s make sure these roadblocks are not getting in your way.
When it comes to goal-setting, sometimes human nature creates barriers which arise in the form of behavioral biases. For example, in the case of “recency bias”, someone may base key financial decisions solely on information from events that recently occurred to them. We’ve seen recency bias get in the way of goal setting if, for example, a couple recently failed to meet a previous financial goal. Missing that goal may lead them to believe they won’t hit future goals. They may decide to avoid the goal-setting process altogether.
Another common challenge is the need to overcome frustration or disappointment from past “mistakes” that have caused financial losses. The loss of these “sunk costs” may continue to impact future financial decisions. Beware of allowing events occurring in the lives of others to influence you and your decisions.
If you’ve been fortunate enough to avoid making financial mistakes thus far, another behavioral bias termed “regret aversion bias” can be an obstacle. When this occurs, the goal-setter may establish more conservative goals in order to avoid the risk of future regrets. And in more extreme cases, they may completely avoid all goal setting because they fear future failure.
Lack of Confidence
Lack of confidence — either in understanding their finances or in the ability to meet financial goals is another reason people may avoid articulating specific financial goals. In other cases, if one party in a couple is more confident or educated on wealth matters, the other partner may hesitate to ask questions or share their thoughts about money matters.
One of the best ways to overcome lower financial confidence is through education. That may mean taking a class about retirement planning at a local community college, finding articles of interest online, or reading the finance section of a newspaper. When it comes to setting financial goals, we prefer that both parties have a certain level of confidence so that the goal-setting process is truly a team effort.
We are champions of communicating with your spouse or family members about money. If you’re not talking constructively about money, it’s very hard to establish mutual goals. Quite simply, if you focus on smaller matters or dredge up sensitive topics, like past spending habits, you may never get to more important conversations about longer-range goals.
It can be helpful to start developing your financial goals independently. This allows each party to work through their range of choices and consider what is most important to them before sharing their goals with their partner. This exercise also tends to contribute to an equality of voice for both parties.
If goal setting conversations remain challenging after trying some of these ideas, consider enlisting a third-party coach or financial adviser to lead you through the conversation.
We recognize that when you’re in the midst of a major life transition, goal setting can become even more complicated. It’s understandable that the future may be confusing or unclear when facing challenges such as a recent job loss, a significant illness, or an impending divorce. Even a positive transition, like receiving a major inheritance, can trigger feelings of uncertainty and become a barrier to articulating concrete goals.
If this rings true for you, try to shorten the time horizon for your goals. For example, if you’re in the midst of a divorce, set a six-month goal for revising your estate plan. Or, if you’ve just received a windfall, set a three-month goal to more fully understand the implications that new money has on your retirement date. In both cases, these near-term goals are achievable in the face of uncertainty as you continue to make progress toward important longer-term goals.
Once you’re ready to begin, set aside time to answer some thought-starter questions. These questions are intended to help you brainstorm ideas for goals you may want to set and may improve the chance that your ultimate financial goals are reflective of your authentic dreams for your life.
Find a few minutes in a quiet space and contemplate the following:
- What current financial problem do I want to address in the near term?
- What aspect of my professional life gives me the most positive energy?
- What financial achievement would bring me the greatest sense of accomplishment?
- What is one near-term (1-2 years) and one longer-term financial goal?
- What am I willing to give up now to reach my longer-term goals?
- What is my vision for the legacy of my life?
While it seems like a simple task, goal setting can be challenging for a number of reasons. First, consider whether any of the barriers we mentioned are getting in your way. Then, take the time to answer our six questions and write those answers down. Think of your answers as guideposts for the financial decisions we’ll be discussing in the coming months. By developing clarity about your goals, you can then establish financial habits and base your decisions on how well they align with your long-term plan.
Dawn Doebler, CPA, CFP®, CDFA® is a senior wealth adviser at The Colony Group. She is also one of the founders of Her Wealth®.