If you want to achieve financial freedom, you need to set it as a goal first. But having a goal is not enough, it has to be a SMART goal.
Having new year resolution is always intimating.
- You want to lose weight so you can fit your old pants in the wardrobe
- You want to make more money so one day you can sack your crazy boss
- You want to start saving because you know you are nearer to your retirement
But if you think about it, aren’t these goals the same goals as last year? Have you been setting the same goals every year but achieve few of them?
I used to think that this is just inertia of human. But after years of setting retirement goals with my clients, I realise that it is because most people have just never been taught how to write effective goals.
With this in mind, I want to offer you a basic goal setting system so you can achieve more this year, the SMART goal system. SMART is the acronym of the 5 most important components of a good goal. I will also give you examples of bad goals so you can learn to tell the difference.
Most importantly, if you follow the steps of this article, you will be able to set your first financial freedom goal today.
Before we start, let me ask you a question.
Do you believe the power of written goals?
I bet your intuitive answer is yes. In fact, you probably know that research has proved it. But here is the thing, have you written your goals for this year yet?
Goal setting is an action-based exercise. When you write something down, you set something in action. To achieve things like financial freedom, you need to solidify your intention toward accomplishing that goal. Because financial freedom is a long haul success and we need a SMART goal to set the direction so we don’t drift away.
So grab a piece of paper now. Let’s do a bit of exercise to help you set your financial freedom goal.
Your goals have to identify exactly what it is you want to accomplish. The clearer your financial freedom vision is, the easier it will be for you to develop your overall plan and follow this goal.
- Bad goal – “I want to achieve financial freedom”. Financial freedom is a good aspiration, but what’s your definition of financial freedom?
- Good goal – I want to achieve financial freedom so my passive income is sufficient to cover my living expenses. It is a stage where I can work only when I want to and not worry about paying for the next bill.
Action: can you write down your financial freedom goal as specific as possible?
A goal like “I want to be healthier” or “I want to lose weight” will never work because it is emotionally charged and your enthusiasm will fade in just a few days.
Why are people stressed with things like retirement? It is because they are not clear how much money is really needed. When you have a measurable goal, you’ll know how far have you accomplished and when you will achieve it.
Let me give you an example. Did you participate the National Step Challenge? It is probably one of the most successful health campaigns. My whole family and a lot of friends participate it and everybody loves it.
Because they give you a tracker to count exactly how many steps you walk every day and they reward you with vouchers based on your steps. So last Sunday, after we had dinner at my in-law’s house, my father-in-law suddenly started to walk around the house instead of watching TV. Only later we realised that he wanted to make sure that he hit his 10,000 steps on that day. And that is the power of a measurable goal.
- Bad goal – “I want to save more money for my retirement.”
- Good goal – “I want to grow my retirement funds to $500,000 in 10 years time.”
Action: can you write down how you want to measure your goal?
Every goal should start with an immediately actionable step.
The distance between your dreams and reality is called action. – Unknown
When setting goals, the typical mistake people make is using the word “to be”.
Every one of us wanted “to be” someone when we grow up. You may want to be a scientist, a doctor or a rock star. But how many of those dreams eventually came true? Our minds do no take “to be” seriously because they don’t know how to get there. We treat it as a future tense and we don’t start working on it.
What really helps us achieve our long-term goals is the small actionable steps we take every single day.
- Bad goal – “I want to be a millionaire.”
- Good goal – “I will start my savings rate from current 10% to 30% in order to achieve my financial freedom”
Action: can you write down your goal with an immediately actionable next step?
You’ve got to be careful here.
When I say realistic, I am not saying they should be in your comfort zone. A good goal should stretch you, and it will be in your discomfort zone.
Having a realistic goal means that it should not be in your delusional zone.
I want to give my children enough money so that they would feel they could do anything, but not so much that they could do nothing. – Warren Buffett
That is the balance you want to strike. Because financial freedom and retirement planning are to balance the trade-offs between the life you want to live today and the life you want to live in the future. Let me give you an example.
Let me give you an example.
Once I was doing financial planning for a client. He said he wants to achieve financial freedom by building Income Generating Assets. His plan was to buy a property in 2 years time so he could reply on the passive rental income for his financial freedom.
That sounded a good idea. So I asked him how much he has set aside for this. It turned out that he had no savings for the down payment, nor did he have enough income for the loan. But he insisted that this was his goal and he had to delay all the other financial plannings for that.
People often fall into this trap of having an unrealistic goal because they overlooked the 3 rules which we have just mentioned. An unrealistic goal is usually:
- Not specific – why exactly do you want to buy a property, is it just because other people are doing so?
- Not measurable – how much rental income can you live on and how much do you have to commit to the purchase
- Not actionable – what is your immediate next step that can help you get closer to save for the downpayment?
Owning a house for rental income may sound like a good idea for many Singaporeans, but having an unrealistic expectation will not go you there.
- Bad goal – “I want to generate $1,000 per month passive income with $20,000 investment capital.”
- Good goal – “I want to convert my $500,000 retirement savings to $2,000 monthly retirement income based on 5% dividend returns.”
Action: can you review if you have concrete steps to achieve your goals?
Every goal needs a time horizon associated with it.
What is the difference between aspiration and goal? An aspiration is just a dream, a goal ends with a deadline. – Ivan Guan
What is wrong with saying “I want to build an investment portfolio that generates 10% return”? By not putting a deadline for a goal, you will easily fall into a performance trap.
Do you want to achieve 10% return in the next month or year-on-year basis for the next 10 years? (You can read this article to learn more about how returns can be manipulated with different time frames)
If you say, “Oh, I have to achieve it in 5 years because I am going to retire then”, it starts to make sense. And your investment strategies can be vastly different.
- Bad goal – I want a 20% return for the money I invested
- Good goal – I want to invest in such a way that my capital grows annualised 8% return for the next 10 years.
Action: can you review if you have set a deadline for your goal? It will be even better if you can put a few milestones in it.
Putting the pieces together to set your financial freedom goal
Now you have seen how a SMART goal looks like. To recap, here is the SMART goal setting system which I personally use and I just shared with you.
And here is the amazing thing. If you have written down your desires and aspirations in this manner, we can put them together now and it becomes your financial freedom goal.
Let’s put together the “good goals” which we set just now.
I want to achieve financial freedom in 10 years time (Time-bound). It is a stage where my passive income is sufficient for my living expenses, I can pursue my passion, work only when I want to and not worry about paying for the next bill (Specific).
One way to achieve it is by converting a $500,000 retirement savings to $2,000 monthly retirement income based on 5% dividend returns (Measurable).
If I put my current savings of $50,000 into investment and regularly top up $1,900 per month in such a way that my capital grows annualised 8% return (Realistic & Actionable), I will be able to accumulate this wealth of $500,000 for the next 10 years (Time-bound).
In order to achieve that, I need to increase my savings rate to 30% of my salary (Realistic). I need to seek professional help and also read more to boost my own financial knowledge (Actionable).
Did you see that? You can use this system to set your goals in 5 minutes time. The SMART goal setting system is not only useful to help you achieve your financial freedom and early retirement. You can use it to accomplish any of your aspirations in life.
I hope by now you have written down your first financial freedom goal. I suggest you put it somewhere visible to yourself so you will be reminded to work towards it every day.
If you like the ideas of this article, do share it using the button below or comment here. There are some further readings here if you want to achieve your financial freedom goals: