Researching The Cost of Your Goals Will Help You Achieve Them
Many people have dreams of getting out of debt, taking a family European vacation, or buying a home. Unfortunately, their dreams never materialize and they are left wondering why.
After you develop your financial goals, make sure they turn into reality. In order to turn your dreams into reality you need to transform them from merely things you dream about into SMART Goals.
Fortune 500 companies long ago learned that developing SMART Goals greatly aids them in achieving their objectives. If Fortune 500 companies, with their experienced executives and thousands of employees, gain benefit from turning their goals SMART, imagine how much more effective it will be in helping you and your family achieve your goals.
What Are SMART Goals
The SMART criteria is a method of writing your goals so they are Specific, Measurable, Attainable, Relevant, and Time-bound. You may have seen the SMART acronym before, but it can be difficult to understand if your goal meets the SMART criteria. This article will look at how to make a goal Measurable as it applies to you financial plan.
Making a Goal Measurable
Measurable means you have identified a way to objectively and mathematically determine if you have achieved the goal. Measurable also means you can see how close you have gotten to the goal along the way. When it comes to goals in your financial plan, the measurement is relatively straightforward. You’ll be measuring the amount of money you've saved toward the cost of the goal.
Research how much it will cost you, in total, to achieve the goal. This will provide you with a very clear gauge of your savings progress toward the goal. You can easily see what percentage of money you have saved toward the goal, and you can see if you’ve already saved enough to achieve the goal. Whether you want to get out of debt, take a family vacation, or buy a home; you have the ability to research exactly how much money you will need to accomplish the goal.
Research the Major Cost
The first step in researching the cost of achieving a goal is to research the major costs associated with the goal. If I asked you how much a pound of chicken costs, you’d probably go to the local grocery and look at the price tag because that’s where you can buy groceries. In much the same way, you can research the cost of any goal by pretending you already have the money and simply going through the motions of making the purchase.
Example: Buying a Home
If you have a goal of buying a home in five to ten years, start looking now at homes in your area which would fit your criteria. Get familiar with the cost of homes in the varying neighborhoods you might be interested in. There are dozens of websites you can do this from the comfort of your home. Many will also give you estimates (wild guesses really) of how home prices in the area may increase in the future.
Also, make sure you understand the loan options and down payment requirement for a loan at your bank or credit union. By multiplying the required down payment percentage by the costs of homes in your area, you can get a good idea of the total down payment you would need to save to afford the home.
Example: European Vacation
Shorter-term and smaller goals can also be researched in a similar fashion. Say you have a goal of taking your family on a vacation to Europe in the next year or two. Begin by pricing airline tickets and hotel costs for the trip by going to your favorite travel website. Some sites will also allow you to set up an alert which will notify you if the prices change for better or worse throughout the year.
The Benefits of Early Research
By pricing the cost when you first start saving for the goal, it will be easier for you to imagine and implement a plan to save the money. You’ll also be able to calculate how much you need to put aside each month to achieve the goal. Inflation will have to be accounted for, which can easily be done through the help of online calculators or a financial adviser.
Another advantage to starting the shopping and pricing process when you first establish you goals is it will help you be a more sophisticated and informed consumer. Being aware of prices and how those prices change over the course of your savings regime will help you avoid overpaying or making your purchase when prices are at their highest.
Research Ancillary Costs
Once you understand the major costs associated with achieving your goal, it’s time to add in the ancillary costs. Ancillary costs are all the additional expenses which get added on along the way. Many people overlook these ancillary costs when goal setting or dismiss them as insignificant.
These costs easily add up to massive amounts, and can often be larger than the original cost. For many, these ancillary cost surprises are what keeps them from achieving their goal. Think about and research any costs which might go along with this goal.
Example: European Vacation
In our European vacation example, plane tickets, hotels, and even food are often easily accounted for when budgeting for the goal. Many don’t include, however, little costs like train fair, souvenirs, museum fees, tickets for entertainment. These 'little costs' often overwhelm a vacation budget, and can add up to more than the plane tickets for some families.
It is likely you’ve experienced the ballooning cost of a vacation in your own life. We've all been surprised by the credit card bill when we come home and tally up how much the vacation actually cost.
Example: Buying a Home
Our house example is an area where many are surprised by the ancillary costs when they go to make the purchase, and are kept from affording the home. Assuming a $400,000 purchase with a 10% down payment loan, a family might save the needed $40,000 down payment in a few years. When they go to buy the house, however, many are surprised by how much more they need in order to close the deal.
Closing costs and other fees associated with the loan can add up to thousands of dollars. Additionally, fire insurance and property taxes are often required to be paid in advance, which can add thousands more. Additional savings may also be required by the lender for the loan. Many financial institutions require three to six months of mortgage payments left over in after-purchase savings to qualify for a loan.
At this point tens of thousands of dollars has been added on top of the down payment, which may make the goal suddenly unattainable. All of this is also before they move in and decide they need new or additional furniture; and before paying for all the refurbishments, repairs, and upgrades to make the house their own.
Talk with Friends Who’ve Been There
In order to avoid these surprises, start by talking with friends and family who have recently achieved the goal you want to achieve. Although they may not have planned any better than you would have, the fact they recently went through it means they will be intimately aware of the costs (and mistakes they made) associated with achieving the goal.
Invite them to dinner and talk about the goal they achieved. Ask what they did and how much each thing cost. Also ask what surprised them and what they wished they knew ahead of time so they could plan better.
Review Documents If Possible
If you are close enough with them, ask to see copies of the paperwork associated with the goal. Obviously most acquaintances won’t be comfortable with that level of disclosure, but close family and your best friends may be willing. Paperwork could include receipts and credit card transactions from a trip, or loan and closing documents for a house purchase. These documents can provide you with invaluable insights into the costs associated with your goal.
Seek Expert Counsel
Whether you know people who have recently achieved the goal or not, you can find help from experts. This is where a competent financial adviser can also be invaluable. A good financial adviser will have dealt with these goals multiple time, not just in their own life but in helping other clients achieve their goals. An adviser should also be able to help you develop a budget to save monthly for the goal so as to minimize the impact on your lifestyle.
If you don’t have a financial adviser, look for professionals who deal with these goals on a daily basis. For a trip, talk with a travel agent and review travel websites or blogs to get a sense of your options what you should be paying.
If you are looking to buy a house, one of your first steps should be to talk to your bank or credit union. The loan officer at your local branch can walk you through the process, answer any questions you may have, and even show you sample documents you can use to get a sense of the total cost of achieving the goal. In fact, if you are hoping to buy a home, talking with your bank or credit union early in the process is probably one of the smartest thing you can do.
Take the Purposeful Finance Challenge
In just a few minutes a week, you can achieve your financial goals. Each week you will receive a simple action item to complete to improve your financial situation. Visit our challenge page and commit to getting in the best financial shape of your life.
Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. His career provides him with a unique insight on personal financial, having been a VP at a financial institution leading up to 2008, and involved with technology and internet stock research leading up to 2000. He can be reached for comment at info@purposefulfinance.org