Goal based financial planning.

​Whenever we meet with someone for the first time, our first appointment is predominantly spent discussing their goals, objectives, and priorities.  While some people know their financial goals, many people don’t.  In addition to this, we also find that sometimes people think they have clear financial planning goals, when in reality they have what could be more accurately called a ‘wish’ or a ‘dream’.

What’s the difference between a wish and a goal?  A goal, or at least a good goal, should meet the following criteria, which can be remembered by the acronym SMART:

• Specific – is it clear exactly what the outcome is we’re looking for?
• Measurable – will we know if we are on track, and/or when we are there?
• Agreed – Is everyone on the ‘same page’ with the goal?
• Realistic – Is it likely to achieve, given the available resources?
• Time Based – When does it need to be done by?

Let’s have a look at some common examples.  Some of the ‘wishes’ we often hear include:

• Go on an overseas trip
• Buy a new car
• Help my kids out

The first thing we do is give this a bit of a tweak, to turn them into the corresponding goals:

• Go on a trip at the end of next year which will cost around $10,000.
• Buy a new car in 2018, with a trade in cost of $20,000.
• Pay our daughter’s rent of $150 per week for the first year of her university degree.

Now let’s look at a slightly harder one.  Many of our clients list as one of the most important things to them ‘having enough for retirement’.  So how do we turn this abstract ‘dream’ into a concrete ‘goal’?  By simply filling in the blanks on the statement below:

• You would like to retire at (retirement age) earning an income of (present value of retirement income needs) in today’s dollars. Assuming an indexation rate of 3%, over (years to retirement), this equates to you requiring (future value of retirement income needs) in the first year of your retirement.  Based on an assumed rate of return of (average investment return on retirement savings), requires a capital base of approximately (total retirement savings) in (month and year of retirement).

While calculating all of the parts of this may not be necessarily be easy, there’s no denying that it’s simple.  By the end of our first appointment, everyone who comes to see us to discuss retirement planning leaves with a SMART retirement goal.
The important thing from our perspective is that these goals have to come first.  The example that I always give is that getting financial planning advice without your financial adviser knowing your goals, is like your travel agent booking a trip for you without knowing where you want to go.

In both cases, you might end up where you wanted to go… but it’s highly unlikely.

Written by Dallas Davison.