Money and You: Course Notes

Before we dive into setting good financial goals, I want you to physically write out at least two financial goals that you have. No restrictions.

Here is the thing about most financial goals. They usually fail. It’s unfortunate, but true. The reason for failure usually isn’t bad luck or an economic downturn. Most financial goals are doomed from the start. This is because most financial goals are vague and have no realistic plan behind them. Maybe a financial goal of yours is to be able to buy a house. It is a nice enough goal, but it is vague with no plan. When do you want to buy the house? How will you save up for it? Is your plan realistic?

A good financial goal need to have certain characteristics. We’ll use saving for a home as an example.

Specific. A financial goal can’t be vague. It needs to be specific. Suppose you would like to buy a house? Depending on the size, location, and type of house you may want, the finances involved will vary wildly. You’ll need a down payment, which can be (maybe possibly) as low as 3.5%, but preferably 20%, of the house’s value. Maybe the kind of home you’re interested in will be worth about $300,000 by the time you buy it, and you want a 15% down payment. Then your more specific goal is, “I want save $45,000 to buy a home.” This goal is specific.

Timed. Your financial goal should have timing to it. In how long will you achieve your goal? How often will you perform a necessary action to work toward that goal? If your goal is to save $45,000 for a down payment, then ask “when will I have that $45,000?” and “how often will I put money aside for it?” For example, you could say, “I want to save $45,000 to buy a home in ten years by saving $400 each month.”

Achievable. Your financial goal should be achievable. That is, it should possible given your current financial situation. Your goal should not bank on the hope that you will land a seven-figure job. Setting a goal of owning a private island is likely not achievable for anyone in this class without some huge inflow of resources. (Did reading that sentence trigger any emotions in you? Make note, if so.) You cannot simply say, “Well, I’ll get a job that pays millions.” You need to be honest about your limitations. The key question is, “What can you manage right now?” Buying an island isn’t very likely or reasonable. On the other hand, buying a home is achievable. About two-thirds of Americans live in a home owned by the occupants. (Note that this is not saying that two-thirds of people or families own their homes!)

Consider the goal of saving $400 each month for a house down payment. The question is whether this goal is achievable or not, given the person’s current financial situation. If not, the goal may need to be altered, or you may need to change your current financial situation.

Realistic. Similar to being achievable, financial goals need to be realistic. Being realistic includes being abstractly achievable, but it also includes making the saving process more tangible. What I mean is that, for example, saving $400 each month may be well within the realm of being possible or achievable. However, realistically, how will you do it? Perhaps, your goal could be, “I want to save $45,000 for a down payment on a home in ten years by saving $200 from each of my biweekly paychecks.” Depending on your situation, this may or may not be realistic. If not, can you change some numbers to make it realistic? Maybe the goal could be, “I want to save $50,000 for a down payment on a house in fifteen years by saving $135 from my biweekly paychecks.”

Now is your time to practice. Come up with two financial goals that are specific, timed, achievable, and realistic. They do not need to be lofty like buying a house, but they certainly can be.

I want you to notice something about what you may be feeling after thinking about financial goals. If you started thinking about what you can realistically do to save money, you likely started feeling stressed. That is okay. In fact, setting financial goals is usually stressful. However, stress is not always bad. (Look up “eustress.”) There are a couple reasons for this stress.

It’s stressful to confront the very real fact that you can’t always get what you want right away (or ever in some cases). (If you want some context for relatively-recent history of buying stuff, ask your parents or grandparents about ordering from the Sears catalog.) It is important that you learn to confront this stress. The more you practice accepting that some goals take time and effort to achieve, the better you will become at achieving them. It’s not a simple thing to do, but it does get easier with practice.

Most financial goals require you to save. Honestly, saving money stinks. Saving money means you have less to spend, which means you need to make some sacrifices in regards to what you buy. For example, one long-term STAR goal I have is to save for my retirement by putting aside the maximum allowed contribution (currently $7,000 a year) into my IRA by depositing $270 from each of my bi-weekly paychecks. It’s a good goal, but that goal means I have about $540 each month that I can’t spend. Thinking about what I could do with an extra $7,000 each year is stressful. However, with the right mindset and some discipline, I accept that my financial goal takes priority over that extra spending money. Here is one tip. Do not think of saving as a sacrifice. If feasible, think of it as part of your regular budget - something that you need to do with each paycheck. Commit to it with a concrete plan and stick with it. It doesn’t take long until saving is a habit.

Perhaps some of you began to actually worry about practically working toward your goals. This may be a sign that your goal isn’t achievable or realistic. When a goal requires you to save, the goal should be one that is within your power to work toward. If your goal is too lofty or requires too much financial compromising, you won’t be able to stick to it. Remember that it is always better to make slower, healthy progress than fast, unsustainable progress. Burnout is very real.

This debrief is not meant to make you feel stress. It is to help you be mindful of any stress you may feel. Stressing over finances doesn’t mean you’re goals are bad, and it is okay to feel some stress over them. Work with that stress to formulate and follow STAR goals.

I’ll give you an example of when I set a financial goal that wasn’t a STAR goal and how it ultimately failed.

After I graduated from college and went to graduate school, I really started thinking about retirement. I knew that my IRA would be an important part of my retirement, and I knew that starting retirement savings early would pay massive dividends later on. So, I set the goal of putting aside the maximum allowed amount each year (then $5,000) into my IRA. That was my whole goal. My goal was specific - it was well-defined and gave a particular dollar amount. However, it was not timed, achievable, or realistic. It wasn’t timed because I didn’t think about how often I would put money aside or how much. It wasn’t achievable because I was only making $20,000 pre-tax. If I put $5,000 from my paychecks aside, I would have only had $10,000-$11,000 a year for housing, food, clothing, utilities, etc. Housing and utilities alone were about $8,000 a year. (This was lower-middle class Indiana around 2008.) It wasn’t realistic because I did not have a particular way to save money that I could actually stick to.

You might think, “well, if he couldn’t save $5,000 a year, he probably saved as much as he could.” Nope.

To reach my goal, I would have needed to set aside $193 from each of my bi-weekly paychecks, which I simply couldn’t do. My brain didn’t go to, “>well, just save what you can.” My brain went to, “I can’t meet this goal with this paycheck. So, I’ll skip it and do it with the next one.” Except I didn’t. I didn’t ever. I occasionally saved money in my IRA - $100 here, $150 there. By the end of my five years in graduate school, I don’t think I saved more than $4,000. That’s way less than the $25,000 I wanted to save. In hindsight, failing to meet my goals stressed me out. It was easier for me to basically mentally abandon that goal.

What went wrong? My goal was simply impossible with my financial situation at the time. It wasn’t a STAR goal. I set my sights too high. My goal should have been, “I will save for retirement by depositing $100 from each of my paychecks for the next five years.” That I could have managed. It wasn’t my first choice of a goal, but it would have been a STAR goal. I could have gotten into a routine of saving that $100 from each check. That would have been $12,000-$13,000 saved by the time I graduated. It doesn’t sound like much of a difference from $4,000 in the grand scheme of retiring, but believe me that it does make a huge difference. (We’ll explore why in later weeks.)

What should you take from this? Yes, setting financial goals takes work. Yes, sticking to your goal paths takes even more work. But setting unreachable goals and failing to make any progress can be a nasty cycle. A good goal can break you out of those cycles.