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Creating Savings Targets that Work

Are you ready to give up aimless wandering towards uncertain financial ends, but frustrated with the endless cycle of setting financial goals that you constantly seem to abandon? You’re not alone. Recent research suggests that for many, our societal obsession with goal setting and goal achievement is leaving most of us feeling disappointed, frustrated, and unmotivated to continue working towards the life we want. However, there are some things we can do as we set savings targets that can significantly increase the likelihood of reaching our financial goals.

Targets vs. Goals

Before we get too far into this post, I want to distinguish between the goals we discussed in the previous post, and what I generally like to call savings “targets.” These targets aren’t goals, they’re a part of a plan we’re using to accomplish our goals. For example, saving an extra $500 a month is not a goal unto itself; it’s a target that’s part of a strategic plan to be able to afford an experience or possession at some point in the future. The goal might be retiring at 55, or buying a house in five years or taking a year off to stay at home with your new baby. That $500 a month is just a target you are using to help you achieve the goal.

Targets that Don’t Work for Us

It turns out that when it comes to our finances, we struggle to set effective targets for one of two major reasons:

  • They don’t realistically set us up for success in achieving our goal, or
  • They are way too difficult for us to reasonably achieve without sacrificing a lot of other things that we consider valuable. So, we quickly give up on them.

To illustrate, let’s say that I want to see the Grand Canyon, and I decide to get there by driving 30 minutes a day from my home in Olympia, in the direction of the Grand Canyon. I’m making a little progress every day, but this target of driving 30 minutes a day will probably not actually effectively help me reach my goal. After six days, I’ll still be in the state of Washington. At that point, I’ll likely feel like I’m getting nowhere towards accomplishing my goal, decide I can’t do it, and give up on it. I guess I wasn’t meant to see the Grand Canyon after all.

On the other hand, let’s say that after consulting Google Maps I determine the Grand Canyon is a 19 hour drive from my house. I decide I’ll drive to the Grand Canyon in one day, because a day has 24 hours in it. If all goes according to plan, I’ll have 5 hours to spare. I have a three-day weekend coming up, so I’ll drive down on Friday, spend a day at the Grand Canyon Saturday, and drive back on Sunday. Back to work on Monday. That works, right?

Those travel plans may sound absurd to anyone who has ever planned a trip. Yet we frequently do this with goals that involve money. Most people live in an endless cycle of setting and abandoning savings targets because we either feel like they are getting us nowhere, or they’re way too difficult to realistically achieve.  For example, saving $200 a month toward a down payment on a $300,000 home is likely to leave you extremely disappointed when, after five years of saving, you’ve only saved enough to make a 4% down payment. On the other hand, if you’ve done the math, and determined that an appropriate savings target is $1000 a month to get that house you want, but your take home pay is $2000 a month, you’re likely to find yourself quickly frustrated at your inability to meet your savings goal.

Setting Targets that Work For Us

What can we do to ensure that our targets don’t end up leaving us feeling hopeless and frustrated?

First, make sure targets are realistic in terms of 1) What is actually needed to achieve the goal, AND 2) What you can reasonably contribute toward the goal. In order to do this, I recommend keeping three things in mind as you develop savings targets to meet your financial goals.

  1. Know what you’re aiming for. If my goal is to retire at 55, or buy a three bedroom house in five years, or put both of my kids through college, I need to know approximately how much money it will take to do that, and how long I have to accumulate that. If I don’t, I could keep diligently saving a little bit every month, only to realize in five years, I have nowhere near enough to put a down payment on that house I really want.
  2. Know your limitations. If you realize you’ll need to save $3000 each month to be able to retire at 55, but your take home pay is $4000 a month, setting a savings goal that out of reach will almost certainly result in disappointment and quick failure. This is likely to leave you discouraged about saving at all. Even though the problem is the opposite of setting a target that’s too low, it leaves you with the same feeling–that accomplishing your goals is impossible, that you’ll never get there. Instead, if meeting your goal on your desired time frame isn’t within your earning and savings capacity, and you don’t have a clear plan for increasing that capacity, it may be time to re-evaluate the goal to make either the timeline or the cost more realistic.
  3. Use ranges for both goals and targets. One way to navigate the “too hard” vs. “too easy” target is to incorporate target ranges, rather than specific numbers. Research has shown that setting a goal range is actually a more effective way to set and achieve goals and targets then having a single number in mind. The attainability of the low end of the target keeps us from getting discouraged, while the high end motivates us to keep working on our goal, even after we’ve met the lower threshold we’ve set for ourselves.

A range also provides for flexibility that a specific number does not. If instead of $500 a month, I set a goal to save $300-$700 a month, then in months where I have unexpected expenses come up, I can still aim to meet my low threshold and keep my momentum going so I’m not tempted to quit. And in months where my earnings may be higher than normal (from a bonus or a tax refund), I’ll be able to put more money towards the higher end of my target. In this way, I’m more likely to stay engaged in the goal, and the targets I’ve designed to get me there, regardless of the circumstances that change around it.

It often makes sense to “pair up” your target ranges with goal ranges. If you want to retire 20 to 25 years from now, then make the low and high end of your savings target correspond to that range. That way you stay motivated to keep working towards the high end of your goal, even after you’ve met the low end because it means you’ll get to retire earlier.

Financial goals have to work for us, both now and in the future. That’s why we started with flexible goals in the first place, and it’s also why incorporating realistic targets (preferably target ranges) is an important step on the path to getting what we want. I encourage you to sit down with each and every one of the flexible goals you’ve written down for your financial future. What will it cost to fund them? On what timeline is it reasonable for you to save that much? Will it require a change in your income producing capacity or spending habits? Now is a time when goals may start to sort and prioritize themselves in terms of both when you want to accomplish them, and which ones you want to fund first. Let that process happen. It will give you a clearer picture of what is really important to you when it comes to money.

Finally, don’t think that we’re done with this yet. Targets are the intermediate step between our goals and the systems that turn dreams into realities. Systems are the most important thing you can actually create and change in your life to not just plan for, but to achieve the life you want. So, stay tuned for that in our next episode of Planning for the Life You Want, where we explore how to create the systems that help us meet our targets and turn our goals into realities.

 

This is the second post in the series: Planning for the Life You Want

The Importance of (Flexible) Goals

As someone who helps people design plans to meet their financial goals, I’m extremely interested in how we set goals, and why they do and do not work for us. While a stream of motivational quotes and speakers showing up routinely on our social media feeds might have us believing that we must set aggressive goals, pursue them with ruthless determination, and never give up until we attain them, for many people, the level of rigidity attached to those “never give up goals” is actually more of a deterrent than a motivator.

It is hard to know what we’re going to want a month from now, much less a year, five years, or twenty years down the road. But to avoid waking up each day and wondering “how did I get here?” or feeling like somehow life is happening to us or around us, without our input, it’s important to give ourselves some direction about what we want in life.

The Importance Of Goal Setting

Goals gives us direction. If we think about our life as a map of the world, we can either say, “I’m content to end up anywhere on this map,” or, “Here are some places I’d like to go, and some things I’d like to see.”

That’s really all goal setting is–looking at your options, and identifying the ones you want to prioritize in life. After all, most of us are not actually completely indifferent to where we end up. And taking an “any which way the wind blows” approach to life leaves a lot up to chance. While we might look back pleased with where the wind blew us, it’s also quite possible that we’ll end up wasting our days and money on something that’s not really important to us. So, if you happen to have a preference about where you end up or where you visit along the way, it’s extremely important to pick a direction you want to go, and then start thinking about how to get there.

Let’s shift that analogy to think about finances. If you’re equally happy with the outcomes: retiring at 55, taking a year off to travel the world or stay home with your new baby, declaring bankruptcy, and losing your home, then it’s fine to proceed without any goal or direction. But if you look at the map of financial possibilities, both good and bad, and you are drawn more to certain outcomes than others, then it’s important to take that first step and identify what you think you want. We’ll explore techniques to get there over the remaining posts in this series. But it’s hard to plan a route if you have no destination in mind.

Making Goals Flexible

You might wonder, “How can I set goals when I’m not sure what I want or what my future holds?” or, “What if an amazing opportunity comes along that I didn’t see coming? Will setting goals interfere with my ability to be spontaneous and live life in the present?” The good news is, no. Goals don’t have to lock you in. They are actually less permanent than tattoos. They should change with us as we get clearer about what we want from life. Maybe you don’t know when you’ll want to retire, whether you’ll want to own a home, or quit your job to travel the world, write a book, or be a stay at home parent. The secret is, you don’t need to. You just need to be willing to take your best guess.

I remember taking myself through through this exercise a few years ago. In my twenties I had some big goals for myself — pay off my student loans, save 15% of my income for retirement, and buy a home. After I bought my house (the last item on my financial “to do” list for that decade of life), I became a bit aimless. I got lazy with how I spent my money, often buying things that I could afford without giving much thought to whether I really wanted them. For awhile, it was sort of freeing to be able to go out and buy something and not feel financial stress about that choice, but then I started to notice that all that aimless spending was sort of bringing me down. I felt like I was wasting money that I knew I would want or need someday, I just didn’t know what I would want it for.

So, I made myself think of something that sounded kind of great to be able to give myself in the future, and I started saving to put wood floors into my house. Over a few years the savings account and the money in it evolved in this sort of a fashion:

In three years I changed the goal multiple times. You might say I didn’t know what I wanted, and you’d be absolutely correct. The point is, it didn’t matter. Having something that I thought I wanted motivated me to reconnect with intentionally spending and saving money. When I finally figured out that I really wanted to start my own business, the money that I needed was there. The temporary goals actually allowed me to be more spontaneous in my decision making because I didn’t have to wait to save up the money I needed or take out a loan.

We don’t need to set our financial goals in cement. In fact, I like to think of them as more like those movable archery targets. We put them out there to guide us, but we can pick them up and move them as we go. Sometimes the moves are drastic turns, other times they’re just minor adjustments to the course. If you decide to start saving for a down payment on a three bedroom house today, but five years from now you’d rather have a paid off tiny house and use the money you would be spending on a mortgage to travel or save for an early retirement, that’s great. Nobody says you have to keep those targets where they are. But by putting a few out there, you’re giving yourself a reason to think about intentionally earning and saving money today for something you’ll value tomorrow.

So take some time to think about what you really want. Look at the map of financial possibilities that exist in the world, and start to identify what’s appealing to you. What do you think you’re going to want a year from now, five years from now, twenty years from now? Challenge yourself not to leave spaces blank, but remember, it’s perfectly okay to write in pencil. In order to keep working towards our goals, they need to evolve with our vision for the life we want.

This is the first post in the series: Planning for the Life You Want

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Sustain Financial Inc. is a Registered Investment Advisor in the State of Washington and California.

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