When saving for the future, most people set goals. When working with a financial advisor, much of the value comes from having a coach who helps set goals and work toward achieving them. What types of goals should people set in order to have a successful outcome?
There are three types of goals: process goals, outcome goals and competitive goals. Process goals are ones that we have complete control over. They relate to actions that we take on a regular basis. Some examples of process goals include making a mortgage payment each month, spending no more than $2500 a month or saving at least $400 each month. Each of these goals relates to actions that a person can take on a regular basis. Each goal is valuable in itself because it creates a positive impact on the individual’s net worth. If we were to imagine a journey, process goals answer the questions “which direction are we going?” and “how fast are we moving?”
Outcome goals are ones that relate to the purpose of our actions. We have somewhat less control over the outcome because life is unpredictable. Some examples of outcome goals include having the mortgage paid off by age 50, being able to retire by age 60 or leaving an inheritance of $300,000 per child. Each of these goals relates to a specific target. These goals may be motivating, because they paint a picture of how life will be when an individual arrives (e.g. mortgage-free, retired, etc.). In our journey metaphor, outcome goals answer the question “what is our destination?” and “how will we know when we arrive?”
Competitive goals relate the progress and targets of an individual with others. These goals are the least under our control and are the most problematic. Some examples might be retiring before my brother-in-law, beating the market this year or spending more money on vacations than my co-worker. You might laugh at the apparent silliness of these goals, but they are very common (although rarely spoken or written down). These goals are most likely to be distracting since they relate to a moving target. They may also contradict other goals and skew process or work at cross purposes to outcomes. In our journey example, it would be like speeding up to pass another car, at the risk of missing your exit.
For a beginner, process goals are most effective. Using a retirement calculator, for example, is almost meaningless if you don’t have a conception of what you can save. Early on, a person should focus on maintaining control of their spending, keeping debt manageable and saving regularly. Once those habits are ingrained, then it makes sense to start focusing on the outcomes. Then use financial calculators to find out when you’ll be debt-free or able to retire at your current pace. If you’re not happy with that outcome, you can tweak the calculations, having an understanding of what it might feel like to spend $250 less each month and save it.
Financial goals can either relate to process, outcome or competition. Process goals should be a person’s first focus, since they are entirely within our control and they also set a foundation for outcome goals. Once good habits are in place, then it makes sense to estimate the likely outcome, if the person maintains their current heading and pace, and determine whether or not to make modifications. Having someone who is supportive, such as a spouse, a close friend or an advisor, helps to stay realistic and motivated.