Financial Goals: Begin with the End in Mind

Introduction

My first two years in medical school were about surviving the academic gauntlet.  I wasn’t thinking as much about financial goals as I should have.  As a second-year medical student, one of my first clinical exercises was to conduct a basic inpatient history and physical exam.  It was an excruciating experience.  I think my patient actually enjoyed it, but it was brutal for me because it took…

Wait for it…

Three and a half hours! 

I asked him every medical history question I could think of, whether it was pertinent to his symptoms or not.  I figured I would get every possible scrap of information I could so I’d be sure to not miss anything.  Then I could later try to synthesize it and come up with a plan.  The problem with that approach was that I didn’t really know where I was going with the interview, so I had no road map to follow to my ultimate destination.

Setting financial goals requires imagining the end first

I think a lot of people approach their finances in the same way.  When we’re in medical school, we have too much to worry about with studying to really think about how to approach our long-term financial goals.  Retirement isn’t even on our radar screen.  All we can think about is next week’s test, next month’s practical exam, or next year’s board exam. 

Oftentimes, we neglect the long-term way of thinking that should guide our decision-making.  This is why nearly 80% of people in the U.S. are living paycheck to paycheck.  They can’t plan more than two weeks ahead because they are totally focused on getting to the next paycheck.

In Stephen Covey’s bestselling book The Seven Habits of Highly Effective People, one of the habits he lays out is to “begin with the end in mind.”  In other words, decide now where you’re going and then plan the steps it will take to get there. 

When I was interviewing my first patient, I should have started with, “What brings you here today?”  Instead, I started with a series of irrelevant questions from my little clipboard.  Beginning with the end in mind would have helped me focus my interview to the half dozen or so questions I really needed.  When approaching your finances, you have to know what your ultimate goal is so that you can take an actionable, realistic approach to get there.

Setting financial goals: what is the end?

Start by asking when you want to retire and quit working.  Do you subscribe to the “Financial Independence, Retire Early (FIRE)” movement?  If so, you may consider the Financial Independence (FI) milestone as your end.  The age for FI may substitute for your retirement age. 

Start by sitting down (with your spouse if you’re married) and writing down some major life goals. To get started, ask yourselves some basic questions.

• When do you want to retire?

  

• What does retirement look like to you? 
• Do you want to continue working in a limited capacity? 
• Are you interested in teaching, serving as a missionary, or doing another activity to maintain clinical skills? 
• What kind of giving do you want to be able to do?

In an early post, I talked about starting with WHY you want to be a health care professional.  Your WHY is critically important to your success in living your retirement  dreams.  In the same way, your WHY for your financial goals needs to be clear. 

More importantly, you and your spouse need to agree on your WHY.  Don’t do any further planning until you get this issue settled.  You’ll start pulling in opposite directions and look up in five years only to realize you never moved forward together.   

Let’s get practical with your financial goals

Let’s say you want to retire at 65.  The first question to ask is, how much money per month do you want to live on?

For example:

The median household income in the United States as of 2018 is about $50,000/year.  Depending on your state income tax, your take-home pay would be around $3,500 per month.  Presumably, you’d like to be living a more comfortable, less frugal lifestyle after decades of sacrificing to reach your goals, so you probably want a higher monthly income.  Use a retirement calculator to help you figure out how much money you need to be saving per month to reach your retirement goals. 

Questions you need to consider when setting your financial goals include:

• Will you have a paid-for house?  (Hint: the answer needs to be yes)
• Do you already have money saved?
• What kinds of investments do you have, e.g., stocks vs bonds vs real estate?
• What is your ideal retirement lifestyle?  Do you want to travel, have hobbies, spend time with family, or just relax with a big stack of books?  The more luxurious your desired lifestyle, the more you’ll need to save.
• Will you and/or your spouse have a pension?
• Do both spouses have an income?
• Are you counting on Social Security?  Personally, I want to plan my finances without Social Security in mind.  If it still exists when I retire, it’ll be a bonus.
• Will you be caring for anyone other than your spouse, such as dependent parents or children?
• Do you want to be able to pay for children to go to college?  What about graduate school?  What about grandkids’ education?
• Do you anticipate having high levels of medical expenses to deal with?
• Do you expect to receive any inheritance from relatives?  Again, I think it’s wise to plan your finances anticipating you’ll get no help from anyone else.  Then, if you do get a financial windfall, it’s just a bonus.  When you plan well, it’s not the end of the world if that windfall doesn’t happen. 

As you think about reaching retirement age, realize that the number you need to keep in mind isn’t your age at all.  The number you need to know is the amount you need in your nest egg to generate sufficient income for the rest of your life. 

Example 1

If you want to live on $100,000 per year and you have $300,000 in investments, you’ll burn through that in about 3 years.  On the other hand, if you have $10,000,000, you should be able to live off the income that your nest egg generates and never touch the principle. 

Example 2

Let’s say you want to retire on $100,000 per year, you have nothing saved for retirement so far, and you plan to retire in 30 years without pension or guaranteed social security. 

If you have $2.5M in investments earning a 7% average rate of return, you’ll be generating $175,000 per year, giving you a cushion to allow you withdraw 4% of your nest egg each year and guarantee you won’t touch the principle. 

If you have $0 in savings to start with, you need to be saving about $1,800 per month to hit that goal.  Once you boil it all down to that monthly number, a lot of the confusion and fear is gone.

Keys to success

Start early: The earlier you start, the less you have to save each month to reach this goal thanks to the power of compound interest.  The best thing you can do in order to reach your retirement goals is to start as early as possible.  Even if you only start saving $100 per month in a Roth IRA, just START! 

Save consistently: Give up trying to time the market.  You don’t know when the next big stock market downturn is happening, and you’ll never guess it consistently.  Just stick to your plan and save your goal amount each month like clockwork.  It’s boring but effective.  Slow and steady wins the race.

Live beneath your means: The number one mistake people make with their finances is that they set their lifestyle and try to save money and give to others out of whatever’s left, which is usually nothing.  Instead, budget for giving and saving first, then live on what’s left over.

Keep a modest lifestyle: You should be getting raises, bonuses, and promotions periodically throughout your career.  When that happens, don’t increase your spending without increasing savings and giving too. 

Learn to manage a financial windfall: When you get a big bonus, a gift, or an inheritance, put it in a savings account or other liquid asset like a money market account and don’t touch it for a few weeks.  Let the initial excitement cool off before you make a huge impulse purchase that derails your financial plan.

Putting it all together

It might all sound a bit overwhelming, but it’s actually really doable.  Just break it down into a few easy steps.

1. Download the free step-by-step guide for developing financial goals.
2. Sit down with your spouse and develop financial goals for your family.
3. Use a retirement calculator to determine the amount of money you need to have saved at the time of retirement and the amount of money to save monthly to reach that goal.
4. Start saving now and save consistently! 

That’s it!  It’s no more complicated that that.  You’ll see lots of blogs talking about supposedly sophisticated ways to build wealth, and the “secrets of the rich.”  The secret of the rich is that it’s not fancy, sophisticated, complicated, or even secret.  Start now, save often, and be intentional.  It really is that easy.  It takes a long time, but it always works.  Good luck!

Further Reading

• Budgeting Part 1 – You WILL Fail Without a Budget
• Budgeting Part 2 – Five Easy Steps to Make a Budget that Helps You Win with Your Money
• You Can’t Afford to Not Be Good with Your Money
• Budgeting Part 3 – How to Budget on an Irregular Income
• You Can Be a Millionaire, and You Should!
• The Beginner’s Guide to Student Loan Management
• How to Get Rich Fast (and Why You Shouldn’t Try to Do It)
• The Emergency Fund: The Account You Need That Won’t Make You Money
• View from the Trenches: Lessons Learned from Years of Financial Coaching
• Four Steps for Calculating Your Net Worth
• Generosity is the Cornerstone of Any Good Financial Plan
• 7 Little Changes That Will Make a Big Difference with Your Income
• Who Is on Your “Personal Board of Directors?”
• You’re Doing Your Insurance Wrong.  Here’s What You Need!

Please leave a comment below and tell us about your retirement dreams!  What motivates you to stick to your financial plan?

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