How to set financial goals for future wealth

Over the years I have had some great conversations with clients around setting and achieving goals and the psychology behind successful investing. In this article I’ll outline a process you might find helpful when setting your financial goals for future wealth, highlighting some key examples that can help drive your progress in achieving them.

I have been in the investment industry for some time and I’m afraid our love for acronyms has rather rubbed off on me over the years. With that in mind I have adapted the SMART acronym to what I call VARPS:

1. Visualise
2. Amount
3. Reasons
4. Patience
5. Stretching

1. Visualise

I’m a great believer in the power of visualising your future self, and by extension your future wealth. There is a great difference in the thought process of someone trying to ‘make it’ to their desired life or goal, versus someone who, in their mind at least, is already there.

Stephen Covey once said we should ‘start with the end in mind’ and this is essentially what we are doing here. You start with mentally visualising the outcome and work backwards to figure out what you need to do to make it a reality.

This can be very useful in a couple of ways. Firstly, your behaviours. Are the decisions you make today helpful for the life you are aiming for? Numerous successful people have used this theory including Steve Jobs and Oprah Winfrey. The exact same approach can work for you too.

Secondly, there is a certain amount of accountability that comes with regularly thinking about your goals. Visualising something is an exercise you can do anywhere, at any time and as often as you like. If you keep seeing your ‘future self’ over time your behaviours will inevitably change and are likely to pull you towards the path needed to achieve your aims.

When working on your vision, think also about timescales. Are you looking to achieve something by a certain date or age? Or is this a more open-ended goal around quality of life, or what you might pass on to the next generation?

2. Amount

This largely speaks for itself in some ways, but avoid the temptation to simply pluck a (large) figure out of thin air. In my experience most people are looking for a quality of life or degree of freedom to spend their life as they wish, and their wealth is the means by which they achieve this.

Whilst having a numerical target can be useful, try not to get too focussed on just the numbers: the broader picture is likely to be around your lifestyle, your legacy, and how you spend your time.

Another aspect to think about is the difference between assets and income. Assets are what you pass on to others. Income is what pays for your lifestyle. Knowing the difference between these two can be very helpful as you plan out your goals.One must also be realistic in matching your wealth goals with your attitude to risk. Ambitious goals tend to require some risk taking to achieve them.

If you are quite risk averse, perhaps something needs to change: either your objective or your savings rate. Investment markets deliver long term returns in lumps. Despite our wishes to the contrary, returns are not delivered in a smooth, linear fashion and we must be prepared for that.

Read more: What to do with a lump sum

3. Reasons

Ask yourself: ”why am I doing this?” Working hard and investing for a long time requires a lot of sacrifice and effort so get your mind focussed in terms of your motivations.

It is this core reasoning that will keep you dedicated and on track. You really don’t want to be the case of the tragic investor who could have had it all but gave up too early. And having your ‘reasons why’ clearly set in your mind will help guard against this.

Your reasons might be many and varied but I would focus on three to five key motivators that you can look back on when times are tough, to help refocus your efforts.

4. Patience

This is in my view one of the most under-rated skills of an investor and can give you a demonstrable edge. If you can master it. Many investors desire results instantly and will either give up or change approach if prompt results are not forthcoming.

I heard a phrase many years ago which sums this up perfectly: ‘everyone is a long-term investor, until it goes down’. Interestingly, it is for this reason that some pension funds start younger savers on a slightly lower risk profile than those in their ‘middle years’, to avoid the psychological effects when markets go down.

If you can master your own discipline of being patient, this can potentially lead to greater results over time. Having your vision clearly set in your mind is also helpful. If your goal is 20 years away, market movements over the last three or six months can be thought of in much more context than just in terms of absolute change in value. Remember, compounding is the investors friend, and without patience you can never use the power of compounding to your advantage.

5. Stretching

Like any goal or plan, your vision shouldn’t be easily achievable. It needs to be a stretch to get to, so you have something to aim for and work hard towards.

Naturally there is a line here between a stretching target and something that is so far out there that you have virtually no chance of reaching it, so use your own judgement.

You are looking for something that is both motivating and a bit daunting, but probably achievable if you set your mind to it. This is quite a personal exercise so find something that works for and suits you. Personally, I tend to favour the general approach of aiming high and risking falling short, rather than aiming low and ‘achieving’ my goals. The important thing it to find something that works for you.

Making your financial goals a reality

Setting your goals and having your investments reflect this can be quite a broad topic and can change over time. Therefore, having professional advisers who are you can talk to and use as a sounding board can be very useful.

The points I raise here should be a useful start and are hopefully thought provoking, However, do remember that other factors unique to your personal circumstances should be taken into account before any decisions are made. This might include any personal preferences on where funds are invested, your attitude to risk, timescales, and other concerns specific to your situation.

I hope this article is of interest and if you feel you’d benefit from a conversation with a financial professional, please get in touch.

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The value of investments and the income from them can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable guide to the future. This article is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal.