How Clear Financial Goals Can Help You Invest More Successfully

New year, new personal goals. But will you stick to them? It’s always a lot harder than it sounds, and I think all of us have dropped a New Year’s resolution or two after a couple of months. Plans change, things happen, and life gets in the way.

So if your 2024 goal is to grow your wealth, what can you do to help yourself commit to the plan?

Well, it starts with setting good, clear goals.

One of the best ways to think about saving and investing is to compare it to fitness. Figuring out our finances is often regarded as a difficult task, much like getting fit, it’s a very common New Year’s resolution, and more often than not it all gets dropped by Easter.

So how do people stick to their gym plan? Well, having a personal trainer helps - that’s someone to drive you forward, give you advice and hold you accountable (a financial advisor would adopt this role for your finances). But long-term gym-goers also tend to have a clear goal: lose a certain amount of weight, build strength to a certain point, get healthier for their family, that sort of thing.

You need a goal like this for your finances, too. Financial goals will:

1. Help you determine your investment horizon. As in, how long will you be saving and investing for, and where’s the most appropriate place for this money to be saved/invested in order to align with that horizon? This will also help you plan how long it will take, so you don’t feel dismayed if it’s ‘dragging on’.

2. Create habits. The real key to successful investing is nothing to do with dollars and percentages. It’s all about habits - and having a focus on outcomes. A focus on outcomes can ensure you stick to the plan instead of spending your investment money on short-term gratification. Like the gym goer, these habits can start small and then can be built on over time - you don’t need to start by committing to going to the gym 5 days a week.

Psychology professor Dr. Gail Matthews from the Dominican University of California performed a study in 2015 focusing on strategies for achieving goals. She split 267 participants (ranging from ages 23 to 72, from a multitude of backgrounds) into five groups, and gave each group different strategies for achieving their goals.

At one end, in the first group, participants were asked to think about what they wanted to achieve within the timespan of the study, but not to write anything down or do any further planning.

At the other end, in the fifth group, participants had to think about their goals, write them down, rate their difficulty, describe what action would be required to achieve each goal, share those commitments with friends, and send weekly progress updates. Groups two, three and four were all in between.

Within Group 1, only 43% finished their stated goals.

Within Group 5, 76% achieved their goals.

“My study provides empirical evidence for the effectiveness of three coaching tools,” said Dr Matthews at the time. And what are those tools?

“Accountability, commitment and writing down one’s goals.”

If you’re no investment expert, will goals really make up for the lack of expertise?

Yes! In fact, we tested how powerful habits can be.

We looked at how the New Zealand share market performed between 2000 and 2022 to identify whether it would have been more effective to invest only at the ‘right time’ (i.e. perfect market timing), or invest a consistent amount over the entire time period, regardless of market performance.

On New Year’s Eve 2000, our imagined investor began putting aside $100 every week for investing. If they were a market expert and placed their investments at precisely the right time (the market bottoms), every time, their investment would now be worth $333,605.

But, had that weekly $100 gone straight into an index fund each week, the investment would now be worth $309,488 - only 7.7% lower! And without all the required expertise, energy, and risk, or trying to perfectly time the market..

You don’t need to be a savvy share market investor to grow your wealth. The important thing is doing it, not waiting until the ‘perfect moment’.

You can read more about this here.

Keep scrolling and you’ll find some specific, practical advice on how to set clear financial goals. But, before we get into that, it’s important you understand what has to happen before you set any goals.

If you’re going to actually follow through with your plan, you need to do a bit of introspection. Rather than sit here and tell yourself you want to save X amount of dollars in Y amount of time, think about why you want to save those dollars in that time.

“People come to me and they say, I want to own so many properties, I want to have so much money,” said Lighthouse Financial Wealth Director James Blair, “and whenever it’s a number or a dollar value-based goal, I give that person - in my experience - a 10 percent chance of achieving it.”

“Numeracy-based goals mean diddly squat. You won’t stay motivated by it.”

To quote James a little further, he said it’s like waking up and deciding you’ll start going to the gym five nights a week to get a six-pack. It’s a hard goal to stick with because it’s not meaningful. But you can make it meaningful by taking time to understand why you want the six-pack in the first place.

You will probably find it easier to stick with your financial plan if you’ve put a tangible, meaningful reason behind it. For example:

• Saving for a house.

• Building an education fund for your children.

• Going on more holidays per year.

• Working fewer hours so you can spend more time with your family.

If you were staring at a new pair of sneakers online and debating whether to spend your money on that or invest it instead, you’re far more likely to go with the investment option if you know it’s for a good cause.

“Money isn’t particularly spectacular,” said James. “You just start with the end result first, then take simple steps to reverse engineer it.”

When you’ve determined what you want to achieve and when you want to achieve it by (i.e. your investment horizon), all you need to do next is work backwards. How much money will you need to invest per week to get to that amount? What sort of returns will you need to see?

This is something that will start small and grow over time. You don’t need to put aside 40 percent of your income straight away. Keep it simple. Build. Get used to investing before going all out.

“It’s amazing what you can do in 10 years, but it doesn’t happen overnight.”

Here’s the other half of keeping it simple - ensuring you can actually achieve what you want to.

Let’s say you’ve given yourself 10 years to invest and putting aside only a small amount - you’re probably not going to walk away with nine properties at the other end of it. But you can still achieve good goals in that time.

To figure out what you might be able to achieve, it can pay to talk to a financial advisor. Or, you can draw up a budget yourself and work out what you earn, what you spend, and therefore what you have left to invest - giving you a good idea as to what your 10-year end result will look like.

“Budgets aren’t about restricting people,” said James. “They’re about knowing where your money’s going, and whether or not you’re happy with where it’s going. There are no right or wrong answers.”

A simple spreadsheet may be enough. Additionally, you can use the budget tool from Sorted, look into a dedicated budgeting platform like Dunedin-based PocketSmith, or get an expert to help you.

It’s very tempting to spend money when you get it. But every dollar spent is a dollar that could have been invested in your goal.

Consider automating as much of the saving and investing process as possible. Set up automatic payments to subtract a certain amount each week so it goes to your fund before you have a chance to spend it. Or, if you can, get the money subtracted from your pay cheque before it ever hits your bank account.

A note on pay rises: If your income increases, it’s easy to get used to spending more money instead of saving more money. This is called ‘lifestyle creep’. As James recommends, when you get a pay rise, consider upping your automatic payment to grow your fund in line with your new income.

A lot of partners don’t talk about their wealth or investment goals with each other. We’ve heard some financial advisors say they take on the role of a therapist when couples realise what the other person has been secretly planning during a session!

Talking about your goals with other people is hugely important (especially your spouse). Of course, it’s good communication generally, letting important people in your life know what you’re planning. But, it’s also a way to be held to your word. It makes you accountable.

Looking back on the research paper I mentioned earlier, the most successful groups (Groups 4 and 5) told other people their goals. Group 5 checked in regularly. It made a huge, quantifiable difference in their success.

This may seem like an odd tip, but it’s an important one, especially for those who are at the early stages of the wealth ladder.

Money isn’t everything.

You can invest time and energy, too - these two things, when spent correctly, can create future wealth just as well as investing cash can.

If you’re struggling to find spare money each week to put aside, James has this advice for you:

“Ask what’s in your control. There’s always going to be another financial crisis around the corner, there’s always going to be something that slows you down. So what’s in your control? What can you do?

Other investment ideas include making an active choice of KiwiSaver provider, knowing where your KiwiSaver even is, and investing in your skill set to increase your income. For this last one, you could tell a manager you want to upskill, seek out new tasks at work, find classes around the community, or just watch 20 minutes of YouTube videos on a regular basis to acquire new skills.