Measuring the Goal
In order to meet your goal, it is essential that the goal be measurable. The following sections will tell you how to make your goal measurable, that is, how to provide yourself with a clear picture of what the goal costs and and how close you are to attaining it.
If you read our discussion of envisioning the goal, you may be thinking: "But I thought you said that pure monetary goals aren't very motivating for most people -- now you're saying to reduce the goal to money. Aren't you contradicting what you said earlier?"
In a word: No! We're not saying that the money represents your goal. However, most goals will have a monetary price tag. The goal may be a retirement yacht, but to obtain that yacht, you will need to have a certain amount of money. How close you are to having the money to pay this price is a convenient way to measure your progress toward reaching your actual goal.
To make your goal measurable, we suggest two steps:
- reducing your goals to a monetary amount and
- setting a deadline to reach the goal.
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Example
Johnnie Dee, who owns and operates a tavern, 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 Johnnie's plan to meet his goal: he hasn't reduced the goal to a monetary amount, and he hasn't set a deadline to achieve the goal.
Although Johnnie'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, Johnnie 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. He might have been able to avoid this disappointment if he had known from the beginning that he would have to increase his monthly saving, or channel the savings into higher yielding investments.
But even if Johnnie 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: First, it will tell you how long it will take you to save for the goal. Second, 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.
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Example
Assume the same facts as the previous example, with Johnnie saving $500 each month for his retirement goal. He has so far saved $12,000 (which he has invested in CDs paying 4.5 percent interest).
However, after reading this discussion, Johnnie decides to investigate the price of the Caribbean property and to set a target date for his retirement. 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:
Charting Savings Progress
| Cost of Property at Time of Retirement |
$265,300 |
| Projected savings: |
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| --Growth of $12,000 at 4.5 percent for 20 years |
$28,944 |
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| --Growth of $500 per month at 4.5 percent for 20 years |
$188,228 |
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| Total Projected Savings: |
$217,172 |
Johnnie 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 (an increase of $148/month would do it).
- He could move some or all of his savings into higher yield investments. If he increases his yield from 4.5 percent to 6.25 percent, his present savings of $500 per month would be sufficient. Note that the risk of loss involved in investment vehicles generally increases with the rate of return.
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Put it in writing. We highly recommend that whenever you decide upon a financial goal that you put it in writing. For one thing, if you write it down, you won't have to worry remembering all of the terms of your goal, as well as the precise deadline and the economic projections behind it.
More significantly, 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 mind set 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.
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Financial Calculators
What will it take to reach your savings goal? Use this Savings Goal Calculator to help you find out. Enter in your savings plan and view graphically your financial results. Click the report button to get more information about your plan, and what you can do to make sure that it is on track.
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