Anyone who goes to the gym knows the pain of searching for a spot in the parking lot at the beginning of January. Yoga classes that are empty the week before Christmas are crammed to capacity as soon as New Year’s Day dawns, and machines that gather dust all summer feature lines three people deep. Then, around the middle of February, the new faces begin to fade. Classes that were temporarily packed regain their elbow-room, and the more esoteric machines in the circuit fade back into obscurity.
There is a similar cycle in financial planning. Between the charging of the Christmas gifts at 18% and the arrival of the bill, many investors resolve to get their financial life under control. The number crunchers at statisticbrain.com tell us that 45% of Americans usually make New Year’s resolutions. Of that group of regular resolvers, 35% of the resolutions are about finances.
Just like getting in shape, the shine of planning for retirement often fades a month or so in, and many investors are back to their same old free-spending ways by spring. In fact, of the people making New Years Resolutions, only about 8% find success. Often the reason that body shapers, and retirement savers, fail in their efforts is that they set the wrong goals.
Just as a 300lb person shouldn’t resolve to weigh 120lbs in three months, someone barely scraping the rent together can’t reasonably expect a balance of $100,000 in the bank by the next time the big ball drops. To assist you in resolving responsibly, let’s adapt 6 guidelines for creating effective weight-loss goals (found on Discovery Fit and Health.com) to preparing for retirement.
Good goals are:
Short Term and Specific – Setting a goal to retire at 55 may make sense when you’re 50, or even 45, but at 25 you just don’t have enough information to know if it will be possible. Set short term goals that are reachable in a few years, and then scale them up as the wealth building process works for you.
Trackable – Make sure that the goals you set have aspects that are quantifiable, and use your portfolio and the meetings with your financial planner to make sure you are on the right track to reach them.
Positive – Despite what you pessimists may think, the human brain works better in a positive direction. Resolving not to be broke in 5 years is much less powerful than a resolution to commit 15% of your after tax income to retirement savings.
Personal – Think about why you want what you want and write that into your goals. A resolution to max out your child’s college savings plan so that they can enjoy the advantage of an education without incurring crushing debt, is personal. Resolving to have more in your retirement account that your best friend, is not.
Rewarding – Take time out to celebrate the small victories. Treating yourself to a steak dinner when you max out your IRA, or a weekend away when your child’s college plan is fully funded, can be powerful motivators to keep on saving.
Realistic – Goals are a funny thing, if you use them correctly they can be rungs on the ladder to your dreams, but used incorrectly they can serve as pointing fingers, criticizing you when you fail, and discouraging further efforts.
Just as it’s important to work with a doctor and a personal trainer when customizing fitness goals, it’s important to speak with a financial planner when setting up retirement plans. They can make sure that the goals you set follow the guidelines above, and can also help you modify them in the case of unforeseen financial situations.
Hopefully, these tips can turn you into one of the people whose resolutions turn into habits, and whose goals turn into stepping stones on the path to a happy retirement.