How Goals Based financial planning can add 15% to your wealth

Updated: Nov 9


There’s a widely cited study conducted by Harvard Business School that demonstrates the power of written goals. The 1979 graduating class of Harvard Business School was asked;

“Have you set clear, written goals for your future and made plans to accomplish them?”

3% of the graduates had written goals and a plan to achieve those goals, 13% had goals, but they were not written down, and the remaining 84% had no goals at all.


The study found that the 3% of graduates from their MBA program who had their goals written down and also had a specific plan for achieving their goals, ended up earning ten times as much as the other 97% put together, just ten years after graduation.


That shows the power of having a written, actionable plan. Wandering through life aimlessly, letting life just happen instead of going after what you want, isn’t a good way to get the life you want.


Of course, just writing down your goals isn’t magically going to make them come true. You have to come up with an actionable plan describing how you are going to achieve your goals, and be determined to achieve your goals. You may have to make adjustments along the way, but staying at it, day after day, month after month will move you forward.

A well-known framework for organizing your goals is the S.M.A.R.T system. Which stands for, specific, measurable, action-oriented and time specific.


Unclear goal: I want to write a novel.


Clear actionable goal: I want to write a novel. I will take a fiction writing course at X college, on X date. I will get up at 5:30 am on Tuesday, Wednesday and Thursday each morning, and devote two hours to writing.


Goals based investing does require more thought, time and attention to monitor your progress. It can be a lengthy process for some to determine what they really want, and what goals are more of a priority over your other goals, but the time invested is well worth it.

What exactly is goals-based investing?


Goals based investing is deciding upon specific financial goals you want to achieve within a specific time frame, and prioritizing the order of importance of your goals. Using the S.M.A.R.T system will give you the precise framework to organize and track your progress.

Creating a vision for how you would like your future to look like and what goals would you have to achieve, to obtain that future.


Goals based investing is much more effective than trying to beat an arbitrary benchmark. It’s easier to visualize your goal becoming reality at the end of your timeline, which is a motivator.


Let’s assume that I have two financial goals that are well-defined and meet the SMART goal-setting criteria:


1) Make a 20% down payment on a $250,000 home in five years.

2) Fund 100% of a child’s university education in 20 years.


Prioritize goals based on necessity and time horizon:


I decide to prioritize my goal of saving for a down payment on a home because the impact of not making the down payment is high. This goal also has a short time horizon of five years. Funding 100% of a child’s education is lower priority for me than making the down payment on a house. I could fund less than 100% of my child’s education because there are other funding sources available such as scholarships, grants, and student loans.


It's also a great idea to create a financial goals vision board, and place it where you will see it. Keep the goal (or goals) in the forefront of your mind. If you write down your goals and then stick the paper in a drawer, the goals will probably be soon forgotten.



Next would be setting up investment accounts for each goal and determining the investment selection that would be needed to fund the goal within the per-determined timeline. A financial advisor can set up and monitor the accounts for you and determine if your goals are reasonable and attainable. If you want to double your money in six months, that’s not a realistic goal.

If you are sufficiently motivated and follow these steps, research has found that goal-based investing can achieve higher returns. Morningstar's head of Retirement Research, David Blanchett, found that a goals-based framework for financial planning led to a 15% increase in utility-adjusted client wealth.1.

That’s some pretty good motivation! That you can possibly increase your wealth just by changing your mindset and how you approach investing. Many times, we’re our own worst enemy because of our fears and biases.


Trusting a process and following the steps is not easy for some. Too often we focus too much on instant gratification, rather than doing what’s best for us, in the long run. I think that’s the difference between people that achieve great wealth and people that seem to be always sabotaging their own efforts.


People that obtain great wealth are disciplined and look at the short and long game. Most often, people give up too soon.


A common trait among people who achieve success is that they bounce back from disappointment and rejection faster. Thomas Edison and Abraham Lincoln are good examples of not giving up. Thomas Edison tried hundreds of different ways to create a long-lasting light bulb until he discovered the material that would work the best and last the longest. Abraham Lincoln lost eight elections before he won the election to become the 16th president.


Our firm used goals-based financial planning because it works. We monitor progress, adjust the plan when necessary and coach every step of the way. In fact, according to a study by Vanguard, the coaching process is remarkably important—driving returns of up to 1.5% more for those who work with advisors vs. those who don’t.

1. Utility-adjustment is a calculation that takes into considerations the investor's risk aversion.

Source: Morningstar

Contact

19 Shelter Cove Lane

Hilton Head Island, SC 29928

​​

Tel: 858-205-7651  (Eastern Time Zone)

kathleen@aurorafinancialpim.com

  • LinkedIn
  • Facebook
Meetings are in-person or virtual

© 2020 Aurora Financial Planning & Investment Management LLC

An Independent Registered Investment Advisory Firm