Using a goals-based approach to financial planning can ensure your financial plan is focused on how your unique set of financial attributes can be used to achieve your personal life goals. Dawn Doebler, senior wealth adviser at The Colony Group lays out some steps for strong financial planning.
Each person has a unique set of wealth attributes, or Dimensions of Wealth, that should be considered when making financial decisions. The same is true when it comes to goal-setting. Using a goals-based approach to financial planning can ensure your financial plan is focused on how your unique set of financial attributes can be used to achieve your personal life goals.
According to our book, Personal Financial Planning for Executive and Entrepreneurs: The Path to Financial Peace of Mind, “Goals-based financial planning differs from traditional, generic financial planning in that, as the name suggests, the process elevates personal financial goals to a position of prominence. At the same time, asset accumulation is relegated to a more utilitarian role, as a marker of progress. It may seem like a minor shift, but a goals-based approach should encourage a more holistic focus and engender a greater sense of ownership in the process.”
Indeed, we find that if couples equally engage in a process to articulate what’s important to them and then match that with a complete understanding of their financial resources, they can build a strong financial plan with concrete action steps integrated into their daily lives. Here are the steps to that process:
Step 1: Articulate your Dreams
Oftentimes, couples spend several years building their careers and financial assets but the goals of their work and accumulation of assets remains ill-defined. In other cases, goals may be suggested by advisers or family members, but those goals are never internalized by the couple as their own. To avoid either trap, take time to think about what really matters to you. Most couples will start by saying “we want to retire early” or “we want to achieve financial independence”. The real challenge is understanding what that actually looks like for you.
In Part 1 of our Taking Control of Your Wealth series, we provided six questions to start the process of clarifying your vision for the future. Couples should answer them separately so that both parties have ownership and commitment to their ultimate financial plan.
Step 2: Understand your Reality
The dreaming phase is very important, and can also be thought of as the qualitative aspect of a goals-based financial planning process. In Step 2, you will evaluate all aspects of your financial life. In other words, this is where you will complete a quantitative analysis of your income and expenses, assets and liabilities, and major risks to your financial health. One of the best tools for this activity is to create a personal Net Worth statement. There are many online tools to help you articulate your assets and liabilities. The realities of current and expected income, potential growth in assets including savings and risks to your financial stability all have potential impact on your ability to achieve your financial goals.
Step 3: Build a bridge
Think of this phase as bringing together your dreams with your financial reality. I think this may be the hardest step in the process. I find many people spend most of their time either living in the present or focusing only on the future. The more difficult place to live is where you are keenly aware of your present while also focused on your personal plan for the future. In other words, how do you use your present resources and future opportunities to move closer to a reality that looks like the vision you created in Step 1?
Sometimes partners have a different understanding of either their vision, their reality, or both. Couples who are willing to go through this more challenging stage tend to have greater success. Rather than going through life with either impersonal or nonspecific goals, those who do the work end up with clearly-articulated goals grounded in the reality of current and expected future resources.
This step is also important because it helps weigh what trade-offs you’re willing to make in current lifestyle in order to redirect resources towards future goals. When there is mutual agreement on the future vision and what it’s going to take to get there, couples are more able to sustain the required level of sacrifice to reach their goals. Life also tends to deliver surprises that either threaten the success of the plan or shake their commitment to it. Mutual engagement and agreement during this stage helps balance those very real threats to success.
In other cases, the necessity of effective communications during this stage can stall or halt the process. Sometimes it takes couples time to reach agreement on their mutual vision for the future. In other cases, it may take one or both parties time to come to terms with the reality of either their current situation or how much sacrifice it’s really going to take to realistically achieve their goals. In these cases, it can be helpful to take more time to communicate with each other. Here are some tips on how to have effective money conversations.
Step 4: Make your Dreams your Reality
Once you understand what aspects of your dreams are realistically achievable, it’s time to establish concrete action steps. This is where quantitative analysis is used to determine how much you’ll need financially and by when. Practically speaking, this is where you calculate how much you need to be saving to reach each of your goals. And remember to assess risk and determine how to best protect your assets.
In this step, consider ways your daily actions can contribute to the goals you have established. It’s about having your goals direct your decisions and living your daily life in alignment with your goals. As simple as that may sound, daily discipline alongside having an eye on the future is the heart of a solid goals-based financial plan.
Doing the work of defining the qualitative aspects of your life alongside the quantitative review of how to execute the plan is what it takes. In the end, this is what will hold your plan together even in the face of threats and unexpected life events.
Dawn Doebler, CPA, CFP®, CDFA® is a senior wealth adviser at The Colony Group. Dawn is also one of the founders of Colony Group’s Her Wealth®.
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