Defining Your Financial Goals
by
Charles Lamson
What are your financial goals? Have you spelled them out? Without financial goals it is impossible to effectively manage your financial resources. We need to know where we are going, in a financial sense, to effectively direct the major financial events in our lives. Perhaps achieving financial independence at a relatively early age is important to you. If so, then activities such as saving, investing, and retirement planning will be an important part of your financial life. You financial goals or preferences must be stated in monetary terms because money, and the utility (defined later) it buys, is an integral part of financial planning.
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The Role of Money
Eighty-one percent of Americans believe that money is power, and 76 percent say that it is freedom. Money is also the common denominator by which all financial transactions are gauged. It is the medium of exchange used as a measure of value in financial transactions. Without the standard unit of exchange provided by the dollar, it would be difficult to set specific personal financial goals and measure progress toward achieving them. Money, as we know it today, is the key consideration in establishing financial goals, yet it is not money as such that most people want. Rather, we want the utility, the amount of satisfaction a person receives from purchasing certain types of quantities of goods and services, that money makes possible. Often, the utility or satisfaction provided, rather than the cost, is the overriding factor in the choice between two items of differing price. People may chose one item over another because of a special feature that provides additional utility. For example, many people will pay more for a car with a CD player than one with only a cassette player. The added utility may result from the actual usefulness of the special feature, or from the "status" it is expected to provide, or both. Regardless, people receive varying levels of satisfaction from similar items that is not necessarily related to the cost of the items. When evaluating alternative qualities of life, spending patterns, and forms of wealth accumulation, we need to consider utility along with cost.
The Psychology of Money
Money and its utility are not only economic concepts, they are also closely linked to the psychological concepts of values, emotion, and personality. Your personal value system---the ideas and beliefs you hold important and use to guide your life---will also shape your attitude toward money and wealth accumulation. If status and image are important to you, you may spend a high proportion of your current income to acquire luxuries. If you place a high value on family life, you may choose a career that offers regular hours and less stress, or an employer who offers "flextime" rather than a higher-paying position requiring travel and lots of overtime. You may have plenty of money but chose to live a frugal lifestyle and do things yourself rather than hire someone to do them for you. Clearly then, financial goals and decisions are consistent with your personal values. Identifying your values allows you to formulate financial plans that provide the greatest personal satisfaction and quality of life.
People react differently to similar situations involving money. Depending on timing and circumstances, emotional responses to money may be positive---such as love, happiness, and security---or negative---such as fear, greed, and insecurity. Most people know it is important to prepare for their financial futures. However, many are very unsure of how to make informed decisions about financial planning.
Because it has a strong effect on one's self-image, money is a primary motivator of personal behavior. Each individual's unique personality and emotional makeup determine the importance and role of money in his or her life. For example, some people, on receipt of a paycheck feel satisfaction in their work. Others feel relief in knowing that they can pay past-due bills. Still others worry over what to do with the money. You should become aware of your own attitudes towards money because they are the basis of your "money personality" and management style.
Some questions to ask yourself are: How important is money to you? Why? What types of spending give you satisfaction? Are you a risk taker? Do you need large financial reserves to feel secure? Knowing the answers to these questions is a prerequisite to developing realistic and effective financial goals and plans. For example, if you prefer immediate satisfaction, you will find it more difficult to achieve long-term net worth or a comfortable retirement at an early age. Clearly, trade-offs between current and future benefits are strongly affected by values, emotions, and personality.
The writers (Gitman & Joehnk) of Personal Financial Planning emphasize a rational, unemotional approach to personal financial planning. The key to effective personal financial planning is a realistic understanding of the role of money and its utility in the individual's life. Effective financial plans are both economically and psychologically sound. They must not only consider the individual's wants, needs, and financial resources, but must also realistically reflect his or her personality and emotional reactions to money.
You must resolve conflicts between your goals and your values, emotions, and personality early in the planning process. If you like to spend most of what you earn, you will find it hard to stick to a plan requiring high levels of annual savings to achieve future goals. You will have to moderate your goals to achieve an acceptable balance between current and future needs.
Money and Relationships
With all the people surrounding the wedding day---the average bride spends between 250 and 700 hours planning her wedding and spends an average of $19,000 on the big day---many couples overlook one of the most important aspects of marriage---financial compatibility. Money can be one of the most emotional issues in any relationship, whether with a partner, your parents, or children. Most people are uncomfortable talking about money matters and avoid such discussions even with their partners. However, differing opinions of how to spend money may threaten the stability of a marriage, or cause arguments between parents and children. Learning to communicate with your partner about money is a critical step in developing effective financial plans.
Your parents will play an important role in your financial planning. As they age, you may have to assume greater responsibility for their care. Do you know what healthcare coverage and financial plans they have in place? Where do they keep important financial and legal documents? What preferences do they have for healthcare should they become incapacitated? Asking these questions may be difficult, but the answers will save you many headaches.
There are many distinct money personality types. One person may be analytical and see money as a means of control while another may view it as a way to express affection, and yet another may use it to boost his or her self-esteem. When couples have very different attitudes towards money---for example, if one person likes to prepare detailed budgets but the other is an impulse shopper---conflicts are bound to arise.
The best way to resolve money disputes is to be aware of your partner's financial style, keep the lines of communication open, and be willing to compromise. It is highly unlikely that you can change your partner's style---or your own, for that matter---but you can work out your differences. Financial planning is an especially important part of the conflict resolution process.
You will gain a better understanding of your differences by working together to establish a set of financial goals that takes into account each person's needs and values. For instance, you may be a risk taker who likes to speculate in the stock market, while your more cautious partner wants to put all your money into a savings account in case one of you loses your job. If you can agree on the amount of money you should have readily available in low-risk investments and savings accounts, you can then allocate a specific portion of your funds to riskier investments.
*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 12-14*
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