How Can You Set the Right Financial Goals?

MARK RIEPE: Welcome to a new season of Financial Decoder. As I record this, we’re several weeks into a new year. A lot of you made New Year’s resolutions, and some of you may have actually kept them, at least so far. But let’s face it, most of you have probably broken them already. 

If you’re in that camp, don’t feel bad. You have a lot of company. The good news is that if you’ve fallen off the resolution wagon, there are lots of resources out there to help you climb back on. But we’re not going to focus on that today. Instead, we’re going to look at how to set goals in the first place, and not just any goals. Since this is Financial Decoder, we’re going to be looking at goals for your financial life.

I’m Mark Riepe. I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It’s a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.

So why is it so hard to keep resolutions? It’s not so much about willpower. Although that certainly plays a part. The problem comes even before we get to the point where we have to resist the temptation to break a resolution or abandon a goal. 

The problem is setting the goals in the first place. Setting good financial goals seems easy and pretty simple, but it’s not. Here’s why it’s so difficult. A relationship with money is often emotional, as you probably know if you’ve been listening to this podcast.

There are steamer trunks full of emotional baggage. Another reason it’s tough to set good goals is that we can only set a goal based on the information we have at the time. Trouble is that information is incomplete. We also have to deal with the fact that life intervenes, things change, the financial ecosystem may change, or our life circumstances may change. The information you had when you set the goal can become obsolete. As a result, your carefully constructed investing strategy and your goals may not match up anymore. 

Finally, there’s not much research out there that specifically studies how to set financial goals. There are plenty of how-to’s for achieving goals, but not so much on setting them in the first place. Luckily, there are folks out there who are really smart about this, and it’s a pleasure to welcome back Cindy Scott to the podcast. 

She’s given our listeners a lot of great information and advice in the past. She’s been helping Schwab clients build personalized wealth management strategies that address topics including retirement planning, distribution and income strategies, education planning, risk management, and estate planning. She has over 25 years of experience and is a CERTIFIED FINANCIAL PLANNER™ certificant, a Chartered Financial Consultant®, and a Chartered Retirement Planning Counselor^SM. She’s also one of our featured columnists on our Schwab Money Talk series. You can hear her work at schwab.com/MoneyTalk. And again, you can see some of her great work there.

MARK: Cindy, some of my favorite episodes of this show are ones where I get to talk to people like yourself who spend all day every day working with real investors, helping them solve real problems. So I really appreciate you being here today.

CINDY SCOTT: Oh, you’re welcome, Mark. Thank you for the invitation.

MARK: The premise of this episode is that many people, they really don’t approach goal setting, especially if the goal is longer term with the same kind of rigor and research as they approach other decisions. Has that been your experience in working with clients? Is that kind of what you’ve been seeing?

CINDY: Yes, absolutely. When it comes to defining specific financial goals, I find that a lot of people have a vague notion of what they want to achieve, but they don’t always have the specificity needed to make their goals a reality. For example, I worked with a lady earlier this week who was very excited about creating the financial plan.

But when I asked her what she most wanted to achieve financially for her retirement, she was quick to say she wanted to maintain her current standard of living. I thought that’s great. And then of course I asked, well, how much do you need monthly to maintain your standard of living? And she had no idea. She did not know. 

So before we could continue with creating her plan, she had to do some homework. She had to catalog her expenses. And this is something I encounter every single week. But from a financial planner standpoint, what I want to say is that I’m OK with that because part of the planning process is to identify goals. And then the very next step is we define the goals. 

And so that means being more specific, how much, what dollar value do we need to put to that goal, or what’s the timeframe in which we have to achieve the goal? So part of the process includes adding the rigor to the thought process so that now we have something specific that we will work towards. And what I would tell investors is don’t let that deter you from seeing or seeking the help that you need because your planner will help you define more specific goals and put the rigor to it.

MARK: I think that’s just a great example of why it’s important to put stuff down on paper. There’s no point in guessing. You just got to do the number crunching. 

CINDY: That’s right.

MARK: Cindy, recently while reading on this subject, I came across the term “radical do-ability.” In other words, an emphasis on easy wins that can be achieved with a high degree of success. What do you think about that approach? When setting such long-term goals, is it helpful to focus on feasibility to avoid biting off more than we can chew?

Or does that approach cause us to maybe set our sights too low and not build enough aspiration into our goals?

CINDY: Mark, I think focusing on easy wins helps them to achieve the larger goal. So if you bite off more than you can chew, you, you potentially can run the risk of being overwhelmed, and you can run into discouragement, but you can still achieve the larger goal by focusing on the easy wins and taking it in bite-size chunks. 

And so to keep people from being discouraged or to keep the motivation up, I would say focus on some easy wins. And an example like saving for retirement, right off the bat, it’s, hey, can I contribute to my 401(k) plan up to the match? Because when you look at the overall need of the amount of money you will need to accumulate to sustain your spending for 30 years, you may look at that today and go, “Well, 3% of my pay right now is just not going to cut it.” But you have to realize your pay, if you’re just starting out, your compensation is likely to increase over the years. And as your compensation increases, so will your contribution by virtue of the fact that you’ve got a bigger base on which that 3% is factored in. 

And also you can do incremental increases in your savings rate. If you bite off more than you can chew, you’re likely to lose momentum, you’re likely to get discouraged, and the worry there is it’ll take you off track, and you might be tempted to give up altogether. 

So bite-sized pieces is what you want to think about. The traditional example is, how do we eat an elephant? Well, one bite at a time. When we’re trying to achieve these financial goals, we need to take the same approach. Bite-sized pieces, do it incrementally in small steps that add up over time.

MARK: Yeah, no, I think that’s great advice. Tons of evidence that helping people break these big topics down into smaller, more digestible pieces makes a lot of sense and makes it easier for them to kind of achieve things and make progress. What about though people with multiple goals? At the end of the day, you know, we’re all being pulled in a lot of different directions. How can you help people prioritize and deal with the inevitable trade-offs that have to be made sometimes?

CINDY: The steps in the planning process are we identify what the goals are, and then we define the goal in terms of timeframe or dollar value. When we identify what the goals are, we place each one in a priority category. With the planning tool we use, we have three categories: needs, wants, and wishes.

Needs are the things that we all absolutely have to have to survive, basic necessities such as food, housing, transportation, healthcare cost. Wants are things that clients want to be able to do like travel or pay for college for their kids or pay for the weddings. And then wishes are things that would be nice to have, but that we’re willing to forego if there isn’t enough money to fund all the goals. So wish could be something like a major purchase, a boat or some type of vacation home or cabin, beach house. 

I’ve even seen people add as a wish the desire to provide financial assistance for a family member, such as a parent or sibling who may not have enough money on their own. One of the reasons we use these priority categories is so we know where to focus when it comes to the saving and investing, especially if there isn’t enough money to fund other things.

So we focus first on making sure the needs will be met. And then we focus on funding the wants. And of course the wishes come last. So that’s how we help them focus on prioritizing savings towards the most important goal, the needs. And then they know that these wishes may have to be reduced. We’ll have to make some trade-offs here if we can’t fund everything.

MARK: We’ll continue our conversation with Cindy Scott in a few moments, but before we do, I wanted to highlight a couple of studies that relates to goal setting. My guess is that if you ask someone to set some goals, most people will start by making a list. That’s a little like packing for a trip. To make a list for what to pack, you should look at the weather forecast for your destination and think about what you’ll be doing there. Will you need your scuba gear, your parka? Will you buy stuff there instead of taking it with you? Will you check your luggage or just have a carry-on?

And just how big is your bag? How much stuff can you really fit in there? Setting financial goals is similar. And this study from a few years ago dives into how we make lists of financial goals. The study’s called “Goals-Based Financial Planning: How Simple Lists Can Overcome Cognitive Blind Spots.” It examines not only how people choose their financial goals, but also how they rank them in importance. 

The researchers asked people who were over 18, but not retired, to fill out a survey. Without any prompting, they listed their top three financial goals. The researchers randomly added the three goals to a master list of 17 common goals. Some of those were things like to buy house, to go on a dream vacation, to feel secure about my finances in retirement, that sort of thing. The volunteers were then shown the master list of goals, which included their three, and then ranked all the goals in order of importance to them.

Some people, when they saw the master list, changed their goals. For example, one person may have said that their goal was to buy a house, but when they saw the master list, they changed their goal to feel more secure about my finances in retirement. About 73% changed either one or more of their top three goals. This study suggests that we may not know ourselves as well as we think we do. When asked to state our top three financial goals with no prompting, we’re probably not going to nail it.

But it also illustrates that looking at a list of goals can help us choose the goals that are truly important to us. Back to the packing example, the same strategy can apply. You may not remember everything you’d like to pack. A list from an outside expert or source can help. You can ask your family to help with the list or friends who travel often or someone you know who’s one of those freakishly organized people. The same is true for setting financial goals. You can ask savvy friends or family members to help or go online. There are many websites that offer lists of financial goals.

Better yet, sit down with your financial advisor who can help you craft a customized list.

MARK: What’s your advice for couples trying to align their financial goals, especially when they have different perspectives on money?

CINDY: Hmm. That’s a good question, Mark. So I’ve got a couple of thoughts here. One, I encourage couples to have an open and honest conversation about each partner’s financial history, their habits, and their attitudes about money, because this will help the couples have a shared understanding of the other person’s experience with and their perspective on money. 

And that’s important to have, in any relationship, but especially when you’re starting out. And then second, I would say for each partner to separately define what’s most important to them in life. So each partner would essentially ask themselves these questions: What matters most to me? What constitutes a life of joy, significance, and meaning in my life? And what do I value above all else in life? 

And so each couple then would take note of their responses and then compare notes to see where they both have overlap because this overlap becomes their shared values. And from there, they can establish financial goals that they know will be aligned with both partners’ values. 

It might be, for one couple, they want to have a rainy day fund to cover unexpected expenses because they both had experiences in life where things popped up, and they didn’t have money to cover that. 

Another couple may want to buy a house or start a business, or one couple may both want to save for an early retirement, or someone else may want to pay 100% of their kids’ college funds. 

So whatever it is, first start with identifying what are my values? What’s most important to me? And then you compare notes with your partner looking for where you overlap. Those become your shared values that lead directly into you establishing some shared goals. 

Another thing for couples to consider is deciding if they’re going to keep their finances separate or if they’re going to combine their money. Some couples merge everything, while others keep separate accounts for personal spending. The objective here is to find a system that feels fair and functional to both partners because we want them to respect each other’s money mindset. 

One partner may be a saver, while another may be a spender. So compromise will be key here, but couples can avoid financial resentment by setting guilt-free spending limits. And we’ve heard about that. So we’re going to come together on our shared goals and values and figure out, are we going to have one account that we save into for ABC goal? And then for our personal spending, perhaps you say, OK, we can each spend X number of dollars guilt free without having to consult the other. That way for the spender in the relationship, they feel that sense of freedom of independence when it comes to money.

OK, and then I would always tell couples that, when needed, seek professional guidance. If money is a recurring issue in the relationship, they should consider premarital or relationship financial counseling to help work through some of those underlying issues. And then also, from a guidance perspective, a financial advisor can provide objective advice tailored to your specific situation. So look for and find a financial advisor that you connect well with and that you trust.

MARK: Many of those approaching retirement have adult children, or their children will be grown when they retire. And we’ve discussed on the show before about how that dynamic can play a role in your financial planning. What’s important to consider when you’re in this early stage of setting goals for your plan?

CINDY: Yeah, it’s really just part of the goal identification process when we talk to families, and we know they are charitably inclined, or perhaps they have the level of wealth today where they want to start gifting to their children and/or grandchildren so that they can see them benefit from it while they’re still alive as opposed to waiting until they pass away and then giving it all to them. 

And so It becomes an important aspect of the financial plan for the parents. When we do financial planning, we factor all of those goals in because that’s what’s important to the family. Now, in terms of involving the children in it, what we typically will encourage parents to do is start having a conversation with your adult children, making sure you share your money values with them.

Because there are some parents when they gift this money to children, adult children, during their lifetimes, they’re expecting the children to use that money in a certain way. Well, the question becomes, are the adult children aware of that? Because if they’re not, they may go spend it on the sports car, whatever the thing is.

And then the parents are a little disappointed because they’re like, well, we were hoping they would put it in a college fund for our grandchildren. So the parents, before they start gifting, they should probably have a conversation with their adult children around their values for money and their expectations or hopes and desires for how the adult children will utilize and spend this money once the parents start giving it to them.

It boils down to communication. If there are clear lines of communication and expectations and some dialogue and discussion where the parents are sharing their intentions and desires, and then the children get to also weigh in and say, well, here’s what our situation looks like, and here’s how we could best benefit from this gift. And just having that open communication and agreement, and I think both sides will benefit from that and have, you know, ease in the relationship when it comes to money.

MARK: Social media is filled with savings challenges, investment trends, and financial influencers. What’s been your impression of their impact? Helpful, impractical, risky, all of the above, none of the above? What do you think?

CINDY: I think, Mark, it’s all of the above, but I do believe the impact has mostly been positive in that it has brought awareness to a variety of financial-planning topics, some of which are very important for couples and individuals and families to address. 

Take, for example, the no-spend challenge. It comes in a variety of approaches, but the idea is you pull back on spending on non-essential items for a set period of time in order to free up money for more important things like paying off debt, creating an emergency fund, or paying for an upcoming vacation. 

So you don’t deprive yourself forever, but the challenge is a catalyst to helping people get started on funding their goals. Or perhaps they can make quicker progress on fulfilling the goal achievement, but to make something like the no-spend challenge stick, you have to commit to apply the new awareness to the rest of your financial life. 

That way it doesn’t become just this two-week challenge that I rely on to, I don’t know, save up some money quickly or pay down some debts over the course of a month or a year, however long you want to commit to the challenge. 

So that’s the one caveat I would have about some of these things that you read or see on social media for these savings challenges is try to figure out how to not just make it a temporary focus, but how to take the lessons and the awareness to apply to your whole financial life so that you develop good disciplines over the course of your life, and it’s not something you rely on as like a crash diet, so to speak.

The other thing is when it comes to some of these investment trends or ideas from these financial influencers on social media, I want people to be aware of the fact that the content may or may not be right for them. The author may or may not have any financial credentials whatsoever. They may be a CERTIFIED FINANCIAL PLANNER, but most are not. 

So work with a financial advisor who knows your situation, who knows what’s important to you, and who can guide you on the most efficient ways for you to achieve your personal goals. And some of these trends online may not align with your personal goals, or they may not be the best way or the most efficient route for you to take to achieve your goals, which is why having your own personal financial advisor can increase your likelihood that you’re going to get advice tailored specifically to you.

So that’s kind of what I’d say about that.

MARK: Comparison with peers is hard to avoid, especially when people are sharing financial milestones online. How do you advise clients to stay focused on their own journey instead of getting caught up in comparisons to other people?

CINDY: First of all, I encourage clients to create a financial plan based on their personal goals and values and what’s most important to them because that’s what those people are doing. They’ve defined the things that they most want to accomplish. 

They put a plan in place to achieve the goal, and then they celebrate the milestone, whether it’s in private, just among themselves and their partner, or they celebrate with their friends online by posting these things to social media. Use some of that celebration that you’re seeing out on social media as a way to inspire and motivate you to go define what’s important to you. 

You don’t need to compare yourself with others in the sense that you’re trying to achieve the same things they are. You want to work on and achieve the things that’s most important to you. That’s what they’re doing.

When you track progress towards your goals, those progress checks become milestones to celebrate, and they also become inspiration and motivation for the rest of the journey. It keeps you going. So you start working on credit card two until it’s paid off and you celebrate again. Then card number three until it’s paid off. 

And then at that point, not only are you celebrating card three is paid off, but now you’re 100% free of all three of those debts, and you celebrate again. So create a financial plan based on your goals, values, and what’s most important to you. And then celebrate the progress along the way, just like these other folks are doing on social media.

MARK: An important point to remember is that goals are about the future. That’s obvious, but it creates a problem. It turns out that we’re not good at imagining ourselves in the future. That makes it tougher to decide what we’ll need in 5, 25, or 40 years down the road. In other words, how can you make a goal that will benefit a future version of yourself if you’re not entirely sure what your future self will actually need or value?

Al Hirschfield, a professor and behavioral scientist at the UCLA Anderson School of Management, wrote a book about this called Your Future Self: How to Make Tomorrow Better Today. In it, he describes how he asked college students to think of their future selves while having their brain scanned. The resulting brain patterns looked more like the patterns of someone thinking of a stranger. 

Hirschfield poses the question that if you see the future you as a different person, or even a stranger, why would you save money for them? But he also found that this tendency is on a spectrum. Some of us feel a stronger connection with our future selves than others. One study he did found that people with a stronger connection to their future selves saved 35% more wealth than people who had below typical levels of connection. 

I suspect that the struggle to connect with our future self is getting worse because we’re living longer than ever. Longer lives means more planning and more complicated goals. Mull that over for a little bit, and while you’re doing that, let’s get back to Cindy Scott.

MARK: You mentioned the idea that some of these trends or challenges are really acting as a catalyst for taking initiative. And I’m wondering if you know of any helpful, let’s say, offline practices that can help get the ball rolling in a similar way.

CINDY: So two things come to mind, Mark. One is the vision board. Long before we had these financial influencers on social media, people were physically putting together vision boards that would basically become a visual representation of the experiences and the things people wanted to bring into their lives. 

And then of course, the vision board was just the first step in that process. It’s kind of the discovery. It’s the visioning process of, here, all of the things that constitute a life of joy, significance, and meaning for me. And then step number two was, OK, now what do we need to do to bring these things to fruition in our lives? Is it something that is a short-term goal, or is it a long-term goal? Will it require little money, no money, a lot of money?

So right, you put the plans together for how you would actually realize those goals in your life. So vision board is one tool. Another tool that’s also been around a very long time, even way before social media, was a values card exercise. And this is one I really, really love because when we talk to clients about putting together a financial plan based on their goals.

Another word for goals is values. What do you value most in life? What are your passions? What are your dreams? What are the things you most want out of life? And then what you would do is put together a plan for how to bring those things about. And so the values though, they kind of get past all of the surface level. 

I want this thing over here or that thing over there. And it gets to the heart of what is truly going to constitute a life of joy and meaning for us. And so the values exercise is like a deck of cards. Think about a deck of playing cards. And on each card, there’s some characteristic, a word written there. Maybe it’s “competition,” maybe it’s “adventure,” maybe it’s “family” or “love” or “meaningful work,” whatever the case may be. 

This deck of cards has all these words on it, and you sort the deck into attributes and characteristics that really jump out and resonate with you that you absolutely want in your life. And then you sort out the ones that you’re like, “That’s nice, but it doesn’t constitute like my top 10.” Right? And so that values exercise is another way that we can then begin the discovery and the visioning process to say, “OK, then what kind of goals do we need to set and plan for?”

That’s going to lead to the realization of whatever that attribute is, right? Family or paying for my kids’ college or being debt free or having excess money or retiring early because maybe there’s a family history of illness and people don’t live very long. So I can’t wait till 65 or 70 to retire. I want to do it at 50.

You know, something like that. So those are two things that just immediately come to mind that’s been around a very long time. 

MARK: What kind of encouragement can you offer to those that are feeling paralyzed by financial anxiety? Maybe they’re ashamed of how long they’ve waited to plan or how far behind they feel. And to really get past those hangups and get started.

CINDY: Think about it like renovating a house. For most people who tackle the project of renovating or gutting a house, usually what has happened is they’ve come to the conclusion that there’s a lot about this house I don’t like, or maybe it’s the bathroom, or it’s just the kitchen, or maybe it’s the floors, or the windows, whatever it is, something about it I don’t like.

And so I’m going to engage in this renovation project to update it so that it becomes a home that we can love. So when it comes to anxiety about where you are in life financially or feeling ashamed of where you’re starting, think about your financial house as a house that has a good frame. 

Maybe it has a great foundation, but maybe there are some updates you need to make to it because there’s something about it you don’t quite like, right? If it’s, I’m ashamed of where I’m starting from, maybe I’m in my 50s and I’ve just started to take retirement planning seriously. Well, think about what you have focused on prior to this point.

For most 50-year-olds, whether you’re a couple or whether you’re single, you’ve probably had a few children. Right? And maybe you put them through high school, you put them through college, you’d help give them a good start to life, or maybe you have parents who are aging, and you’re having to spend a lot more of your money to help your aging or ailing parents. 

And so give yourself a break because life happens to all of us. And you’ve done a good job putting the kids through high school and getting them through college. You’ve supported the people in your family who needed you the most. And now you’ve come to that stage of life where you’re saying, “I’ve got to look after me.” We’ve got to prepare for retirement. 

It’s OK. You are where you are. You’ve got a good house. You’ve got a good start. We just need to tweak some things and change some things. And it’s going to take some time. It’s probably going to create more dust than we anticipate, may take us a little bit longer, we may not be able to retire at 60, we may have to work to 67, but with some compromise and with a plan, you can still make a lot of progress on achieving the goals that you want to achieve. 

So try to just release some of that anxiety, let go of the shame, and say, “You know what? Life happened, and I dealt with it in the best way I could. And now I’m at the stage where I want a plan financially, and I’m going go get the help we need to put a plan in place to achieve what’s most important to us for this next phase of life.”

MARK: As always, Cindy gave us lot of great tips on setting goals for your investing.

I hope we shed some light on these complicated decisions and made it a little bit less daunting. If you haven’t set specific financial goals, perhaps now you’ll consider it and start making that list. 

If you need help getting started, we have lots of lists, as well as planners, trackers, worksheets, and a lot of tools to help you plan for all kinds of life events. They’re all on our website at SchwabMoneyWise.com. That’s all one word, SchwabMoneyWise.com, and the link is in the show notes. But of course, all of our situations are different. To fully address your financial goals, talk to your financial advisor.

That’s it for this episode. You’ll hear from me again in a couple of weeks with a new feature about a topic we found to be especially compelling. In the meantime, if you’d like to hear more from me, you can follow me on my LinkedIn page or at X @MarkRiepe, M-A-R-K-R-I-E-P-E. 

And if you like the show, we’d be grateful for a rating or review on Apple Podcasts or comment on the show if you listen to it via Spotify. We always like new listeners, and if you know someone who might like the show, please tell them about it and how they can follow us for free in their favorite podcasting app.

For important disclosures, see the show notes and Schwab.com/FinancialDecoder.