Build Wealth By Setting Goals and Implementing a Plan
Few things come to fruition without careful planning and the tenacity to stick to that plan. Learn the ins and outs of goal-setting and -implementing to build your wealth.
We've all heard the adage: "Be careful what you wish for, you just might get it." A more realistic statement about attaining financial security might be: "Be careful what you wish for and how you plan to get it, or you won't."
This may sound pessimistic, but it's really not. You can succeed in reaching your goals for building wealth for your lifetime use and passing it along to your heirs. But, in order to do it, you'll need to do things a bit differently from most people, who rarely create workable personal financial plans, or, if they do, don't follow through long enough to see the benefit in them.
If you ask people how wealthy people got that way, you may hear several explanations:
- "they were lucky"
- "they were true financial geniuses"
- "they inherited it"
While any or all of these statements may be true, they won't help most of us, who are not that lucky, that fortunate in picking our relatives or that smart financially. But remember that this list omits what y is the most important factor: "they were determined to meet their business and personal financial goals."
In order to direct your determination where it will help you the most, you must first identify what you have now. Assuming you've done that, the next step is to set your goals for the future.
We've identified two important aspects of goal-setting:
- envisioning the goal
- making your goals measurable
The Problem with Overreaching Goals
Goal setting is extremely important and it deserves to be done correctly. Hastily constructed, ill-conceived goals may do more harm than good.
If the goals take you in the wrong direction, or are simply too easy to achieve, achieving them will not help you much. If the goals are so difficult that they are practically impossible to reach, you are setting yourself up for failure.
Envisioning Your Goal is the First Step to Achieving Your Goals
What's the best way to set goals that will help motivate you to achieve your personal financial wants and needs?
Most of us are not strongly motivated by money itself. Before you reject this statement out of hand, think of this: unless you are a coin or currency collector, the thrill of having five million dollars in a locked vault would vanish quickly if you couldn't spend it or use it in any way.
In much the same way, a purely monetary goal may not be a very powerful motivator: Most of us need to focus on tangible items or tangible benefits. (Despite this statement, some people are motivated by money and are moved to action by the numbers. If you are such a person, you can move right on to the discussion of making your goals measurable.)
For most of us, though, one of the first steps in goal setting is finding a concrete goal or goals that motivate us emotionally. How about that powder-blue '59 Caddy convertible, the retirement villa on Maui, the ability to cut back the hours you work, or the satisfaction you would gain from setting up and funding your own charitable foundation?
Spend a day or two making up a list of the things you've always wanted, and prioritizing them. You'll probably find that you have some short-term goals and some long-term goals.
Make sure these are your goals—not someone else's and not what you think you should want. If you're honest with yourself about what you really want, when the going gets rough, you will find it easier to have the self-discipline to stick to the plan needed to attain the goal.
Once you have come up with the goals that will push you on to action, don't let the dream die. If you haven't done so already, do enough research on your goal so that you know it "inside and out." Imagine at least once a day how it would be to have your goal, and how your life would be improved by having it. If the goal can be represented by a picture (such as the '59 Caddy), keep one or more pictures of it where you're bound to notice it.
The Problem with Overreaching Goals
If you go no further with our suggested goal-setting process, these vivid imaginings will be little more than daydreams. They can waste your time, and worse still, provide an excuse not to do those distasteful, but necessary things that you must do to grow your business (such as, for instance, cold-calling prospective customers). To really derive the benefit from the exercise of envisioning your goals, you must move on to making your goals measurable.
Measurable Goals Are the Key to Success
There are two steps to making a financial goal measurable—and therefore achievable:
- reduce your goals to a monetary amount
- set a deadline to reach the goal
Yes, earlier we did say that that pure monetary goals aren't very
motivating for most people. And we stand by that assertion. But even if
money is not your goal, most goals carry a monetary price tag.
How close you are to having the money to pay this price is a
convenient way to measure your progress toward reaching your actual
Case Study: Improving Goals
Nathan Chicago, who owns and operates a newsstand, has been dutifully
saving $500 each month. He has a detailed picture in his mind's eye of
what would be the ultimate retirement property: a small cottage
overlooking a white sand beach on an island in the Caribbean.
There are two problems with Nathan's savings plan:
- he hasn't reduced the goal to a monetary amount
- he hasn't set a deadline to achieve the goal
Although Nathan's vivid imagination may be enough to encourage him to
continue saving the $500 per month, this will not necessarily ensure
that he will reach his retirement goal.
Without knowing how much such a property would cost, Nathan runs the
risk that he won't have enough saved at his retirement to buy such a
property. After a lifetime of saving for the goal, this would be a
devastating disappointment. But his disappointment probably could be
avoided if he had known from the beginning that he would have to
increase his monthly saving, or channel the savings into higher yielding
But even if Nathan knows what his dream property would cost, he still
has a problem: He hasn't set a target date to attain the goal. Setting
such a deadline performs two functions:
- it will tell you how long it will take you to save for the goal
- with proper planning, it will allow you to measure at any point in time whether you are on track for meeting the goal, or whether a mid-course correction needs to be made
Let's say Nathan has saved $12,000 (which he has invested in CDs
paying a nice 4.5 percent interest). And he's decided to investigate the
price of the Caribbean property so he can set a target date for his
He finds out that his ideal retirement property now costs about
$100,000 (with local real estate agents telling him that it's likely to
appreciate in value at about 5 percent per year), and he wants to retire
in 20 years.
To figure if he is on track to meet his goal, let's compare the price
he'll have to pay for a similar property in 20 years with how much
money he will have accumulated by this time:
|Cost of property ||$265,300 |
|Projected savings: |
|Growth of $12,000 at 4.5 percent for 20 years ||28,944 |
|Growth of $500 per month at 4.5 percent for 20 years ||188,228 |
Our friend Nathan has a problem: he will be $48,128 short.
He has a couple of obvious choices to remedy this situation:
- He could increase his monthly savings by $148 a month.
- He could move some or all of his savings into higher yield
investments. If he can manage to increase his yield from 4.5 percent to
6.25 percent, his present savings of $500 per month would be sufficient.
Put Your Goals in Writing
Whenever you decide upon a financial goal, you put it in writing. In
our experience, goals physically written down offer two important
- You won't have to worry remembering all of the terms of your
goal, as well as the precise deadline and the economic projections
- Once you have reduced something to writing, chances are that you
will regard it as more important than a promise that you have only
mentally made to yourself. Most of us have been warned about being
careful about signing things, so you can take advantage of this mindset
by making yourself "sign on" to the terms of your goal.
Be sure to keep your written goal somewhere where you are sure to see it.
Crafting a Wealth-Building Plan to Reach Your Financial Goals
Most financial plans are focused on goals or events that will happen
in the future, such as saving for your children's college education or
for retirement. Because most costs go up over time, determining how much
to set aside each month is a bit more complicated than just dividing
the current cost of the item by the number of savings periods you'll
have before you reach the deadline that you set for attaining the goal.
Use the following steps to estimate the amount you need to reach your goal and whether your wealth-building plan is adequate.
- Estimate the cost of the goal at the date you plan to attain it. To do this, take the current cost of the goal and adjust it for inflation up through the time you will reach the goal.
The current cost of your goal is $50,000. After investigation,
you believe that the cost will increase about 4.5 percent per year for
the next 25 years. Assuming you want to reach the goal at the end of
year 25, you will have accumulate $150,270 to do so.
- Take the amount that you will earmark for the goal and determine
how much it will grow between now and the date on which you want to
reach your goal. (This process is identical to that of figuring how much
a particular item will increase in cost over time, except that instead
of an estimated inflation rate, you'll use an estimated growth rate.)
Make the initial calculation based upon what would happen if you did not
make changes to your savings vehicles. For example, if you currently
have the money in a 10-year CD, use that interest rate to determine the
rate of growth.
Determine how much you will periodically save to reach your goal and
how much this investment will increase over time based on what you
estimate its yield will be over the life of the investment. Unless you
will accumulate these savings in a tax-free form (such as municipal
bonds), or tax-deferred (such as within a qualified retirement plan or
an insurance policy), you should make this computation based on
Add the amounts you determined in Step 2 and Step 3 together.
Compare this amount to the project cost of your goal, which you
determined in Step 1.
If the amount of your projected investments is greater than the
amount of your projected cost of the goal, your savings and investment
strategy is on track. Of course, you will need to revisit these
calculations periodically to make sure that the various assumptions you
made in the course of setting up your plan are correct and have not
changed over the course of time.
If the amount of your projected investments is less than the amount of your projected cost of the goal, you'll need to consider making changes necessary to reach your goal.
Computing After-Tax Yield
To compute your after tax yield on an investment, you need to know
your tax bracket (marginal tax rate) and the stated, pre-tax yield of
your investment. The formula for determining the pre-tax yield you'll
need to equal a particular after-tax yield is:
Myrtle, who is in the 15 percent marginal tax bracket, purchased a
seven-year Certificate of Deposit (CD) with an annual pre-tax yield of
3.25 percent. To find the after-tax yield, Myrtle subtracts .15 from
1.0, which gives her .85. She multiples her pre-tax yield (3.25 percent)
by .85 to determine her after-tax yield is 2.75 percent.
The following are after-tax equivalents for pre-tax yields. As you
can see, the higher your tax bracket, the higher the pre-tax yield needs
to be in order to return your desired post-tax yield.
To use the table, locate your marginal tax rate in the first column,
and read across that line and locate the pre-tax yield. The number in
the top of that column is your after-tax yield.
|Sample After-Tax and Pre-Tax Yield Comparison |
|Tax rate (%) ||After-tax yield (%): ||2.0 ||3.0 ||4.0 ||5.0 ||6.0 ||7.0 ||8.0 ||10.0 ||12.0 |
| ||Pre-tax yield (%): ||EQUALS |
|10 || ||2.22 ||3.33 ||4.44 ||5.56 ||6.67 ||7.78 ||8.89 ||11.11 ||13.33 |
|15 || ||2.35 ||3.53 ||4.70 ||5.88 ||7.05 ||8.24 ||9.42 ||11.76 ||14.18 |
|25 || ||2.67 ||4.0 ||5.33 ||6.67 ||8.0 ||9.33 ||10.67 ||13.33 ||16.0 |
|28 || ||2.77 ||4.17 ||5.56 ||6.94 ||8.33 ||9.72 ||11.11 ||13.89 ||16.67 |
|33 || ||2.99 ||4.48 ||5.98 ||7.46 ||8.96 ||10.45 ||11.94 ||14.93 ||17.91 |
|35 || ||3.08 ||4.62 ||6.15 ||7.69 ||9.23 ||10.77 ||12.31 ||15.38 ||18.46 |
Implementing Your Wealth-Building Plan Is Essential
Now that you have gone through the important steps of identifying your current assets,
setting goals and planning how to reach your goals, you can start the
most important part: carrying the plan forward and making it work.
A financial plan can be a thing of beauty in terms of how it
meticulously identifies your current assets, captures your vision of the
future and plans how to make your financial dreams come true, but if it
is not implemented it will eventually just be a dry collection of
"what-might-have-beens." The importance of not waiting is illustrated by
the following example:
John Morris, a 28-year-old business owner, has gone through all the steps suggested in Building Your Personal Wealth.
Based on his investigations, John is seriously considering making a
yearly investment of $2,000 in an IRA-qualified mutual fund that invests
primarily in small, growth company stocks. He learns that although he
won't be able to get a tax deduction for his contributions because he's
over the applicable income limitations, the income that accrues in the
account will not be taxed until he begins to withdraw it at retirement.
Based on the track record of a particular growth company mutual fund
over its entire lifetime, John asks the broker to project what a $2,000
IRA contribution would grow to at his retirement (at age 65), assuming
an annual yield of 12 percent.
Assuming John will begin his annual $2,000 contributions this year on
his 29th birthday, the broker's projections show the following:
|Age ||Projected Account |
Balance on Birthday
|Age ||Projected Account |
Balance on Birthday
|Age ||Projected Account |
Balance on Birthday
|30 ||$4,240 ||35 ||$16,230 ||40 ||$41,309 |
|45 ||$85,507 ||50 ||$163,397 ||55 ||$300,679 |
|60 ||$542,604 ||64 ||$863,357 ||65 ||$968,659 |
Looking at the above example, John will have almost a million dollars
($968,959) at retirement, simply by contributing $2,000 each year
beginning at age 29. But if he waits just one year later to begin his
investment plan, and still retires at 65, he will have $863,357, which
is a whopping $105,602 less.
You may look at the example and raise several objections:
- "I'm not 28 anymore, so I don't have nearly as long as John to save for my goals."
- "I don't want to tie up my money by putting it in a retirement plan—I may have an urgent need for it in my business."
- "I'm not comfortable investing in an aggressive investment like a
growth company mutual fund, so projecting for 12 percent yearly growth
is out of the question."
Even if some, or all, of the naysaying applies to you, they only
lessen the amount available at retirement. They don't change this basic
fact: no matter what kind of savings or wealth-building plan you
choose, your chances of success increase the sooner you put it into
Monitoring Your Plan Keeps You on Track
Nothing lasts forever, especially a personal financial plan. If you
have invested the time, effort and money needed to implement your
financial plan, you definitely don't want changed circumstances to make
your plan obsolete.
Many changes can happen in life that may make it advisable for you to
change your personal financial plan. When you are confronted with
changes in circumstances, the first rule is simple: Don't panic.
It's quite likely that some, if not most, of your plan will still be
okay. We don't say this to lull you into a false sense of security, but
only so you're not so discouraged that you ignore the change and hope
that it doesn't have an adverse effect on your plan.
Remember, as bad as living with an outdated plan is, dying with an
outdated plan may be worse, since your family may no longer be able to
correct the problem. And, it's an excellent idea to review your plan on a
regular basis—for example, during your birthday month.
You need to consider two categories of changes:
- those that have a direct monetary impact
- those that do not have a direct monetary impact
Changes Having a Direct Monetary Effect
Some changes have a direct and immediate monetary effect on your financial plan. These include:
- the cost of your goal increases or decreases
- your ability to make the required savings to reach your goal increases or decreases
- the yield (interest, dividends and capital gains) on your savings or investment increases or decreases
- the timeline for attaining the goal increases or decreases
You have to expect that any of the first three items will change
somewhat over time. When we talk about changed circumstances within the
context of amending your financial plan, we mean changes that are large
enough to potentially affect whether you reach your goal.
To determine if the changes are this large, we suggest that you take a look at our discussion of planning to reach your goals.
Changes Having an Indirect Monetary Effect
In addition to those changes that have a direct monetary affect on
your financial plan, there are changes which affect your financial plan
These indirect changes may be just as important as the direct
changes, but with the added complication that you may be less likely to
think about their connection to the financial planning that you have
After all, if your ability to make the required saving payment, you
know to see if you need to modify your plan. However, more indirect
changes, like the following, may escape your attention:
- Tax law changes. Changes to the federal tax law, in
particular, can have a major impact on your financial plan. If, for
example, the tax rates go up, you may well have to count on increased
savings or increased yields to make up for the additional money lost to
the tax collector. Estate tax changes may affect your strategy for
making gifts and bequests.
- Business climate changes. Significant changes in the
economy will likely affect your plan. A general rise in interest rates,
for instance, can be expected to drive down the value of your fixed
interest rate investments, making it necessary for you to increase your
savings or increase your investment yield (something that should be less
difficult because of the climbing interest rates.) A general decrease
in the interest rates will likely increase the value of your fixed
interest investments, but will make it more difficult to maintain your
current yield on future investments.
- Personal family changes. This category is probably
hardest to get a handle on because any number of changes to your family
situation can affect your financial plan greatly. No list can contain
all of the things you should watch for, but here are some of the most
- new children (by birth, adoption or by marriage), new grandchildren, nieces or nephews
- changes to marital status: marriage, divorce, separation, remarriage
- health problems suffered by you or your family members
- job or business changes that significantly change your current income
- sudden wealth (such as by inheritance) and sudden financial reverses (such as from a legal judgment)
- your disability or death (or the disability or death of family members or business partners or associates)
- changed educational plans for your children or grandchildren
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