Setting short term goals for long term benefit

Building wealth is a slow process and usually takes decades to do. This can make goal setting difficult for most people. How does a 30 year old stay focused on the goal of retiring at 60 years of age? They have another lifetime to go through before they get to their goal. Life will change in so many ways over that period. What is the best way of creating goals that will have long term benefits.

Bite sized chunks

The easiest way to start achieving your financial goals is to break any challenge down into bite sized chunks. If you are able to shorten the term you have a much better chance of achieving your goal.

It is like trying to lose weight. If you set yourself a target of losing 10kg in a year, it is hard to keep track on how you are doing. You might overindulge and say you’ll make it up later in the year. But if you set a goal of losing weight each week and weigh yourself regularly, you can see if you are staying on track. You also get that little sense of achievement each week when you are lighter than the week before. And if you aren’t, you know what to do to improve for the following week.

One of my clients was spending too much and it was impeding his ability to grow his wealth. The solution we came up with was he would keep track of his monthly expenditure (broken down into categories, not item specific) and he would send it to me each month. Not only was he now acutely aware of his monthly expenditure but he was being held accountable by a third party. Within a year, his spending was under control and he had accumulated a significant amount of money for other use. And while he no longer needs to send me his monthly expenditures, he still does so as it is now a habit. And his wealth is continuing to grow too.

Pensions

Given the long term nature of pensions, it is easy to kick the retirement planning can down the road. So shorten the target. First thing is to start contributing to a pension. Then you need to work out how much do you need at retirement? Based on reasonable returns, how much do you need to contribute per month to achieve that goal? The number is usually too high for most, so what if you start smaller and then increase the contributions? How small can you start? Then each year, how much can you afford to increase it by?

If you are part of an occupational pension scheme it is very important that you do your homework on how much you can expect at retirement and if it is enough. Say your employer pays 5% of salary to your pension and you contribute 3%. That’s not going to get you enough at retirement but there are lots of members who just think that because they are in a pension scheme, they will have enough to live off in retirement.

Debt

Debt is another long term obligation that we have that goes on for decades. If you ever use calculators to see the impact of putting a lump sum against your mortgage, you’ll see it hardly makes a dent (unless making a very large payment). This can be disillusioning and you wonder what the point is, so you do nothing. But doing nothing certainly won’t reduce the mortgage term.

Set the goal of overpaying by say 10% this year (10% of the outstanding balance is the maximum overpayment allowed for fixed term mortgages). Do it again the following year and the next. This will have a snowball effect on the size of your mortgage and it will take years off the debt. Reducing a mortgage from 30 years to 25 years is a significant reduction in the term, so don’t think you need to reduce it to less than 10 years.

Good habits

The real benefit of setting short term goals for your money is it creates good habits. And if you are doing the right thing for decades, the long term goals will fall into place.

 

Steven Barrett

4 December 2023