How to Set Goals SMARTly

SMART Goal setting

   We’ve talked about goal setting as essential for success. Those 5-year goals, defining what success means to you. These are your plans for the future. These grand goals you set for yourself years from now can often be broken down further, into milestone goals, and ultimately behaviors. But before we can get granular with our goal setting endeavors, we need to ensure our goals are well formed. Without well formed goals, we run the risk of misalignment of our actions, and ending up off-course.

   So what does it take to set well-formed goals? The most popular framework that is used in goal setting is the SMART framework. By using the SMART framework outlined below, you can ensure that your goals, when executed upon, will lead you to your envisioned future.

Let’s look at the framework:

   Specific: Each goal needs to be as clearly defined as possible, so that you will know when you have achieved the desired result. You should be focusing on the What, Where, and When questions. For example: Running isn’t sufficient. Running the Boston marathon next year provides a specific element so that you will know when you have succeeded.

   Measurable: Determining the specifics of the goal should have provided a unit of measurement so that you will know when you have fulfilled your goal. In the above example, Boston marathon is the unit of measure that, once reached, will spell out success for your goal. For many of us, success is more than a finish line though, and having a measurable benchmark is more appropriate. These maintenance goals are just as important, and might involve staying a certain body size/weight, attending X social outings in Y time frame, or maintaining a base level of financial wealth.

   Attainable: Here is your action plan, as well as an honest look as to how realistic the goal is. It is important when setting personal goals to only include aspects that you can directly control. The other aspect of Attainable, is answering How you plan to reach your goal.

   Example: Your goal might be to learn valuable skills to pursue a career in Nursing in 2 years time. Your how in this case might be attending a local school to educate yourself in the various subjects and studies required by nurses. It is important to note that the goal is to set yourself up for a job, not obtain one, as you cannot exert full control over the hiring process.

   Relevant: now is the time to relate this back to your life mission. Will accomplishing this goal help you on your journey? There are so many competing demands for our time and energy, it is important that you do things that drive success in your life, however you have defined that.

   Time-bound: To hold yourself accountable, all goals need to have a deadline. It is much easier to work towards an end target. Having an end target in mind frames the efforts that will be required, such as our 5-year goal setting. Or, as in the case of the above examples, the marathon is set for next year, or pursuing a career in two years. These timelines help you work backwards to determine the steps needed now, and also provide a definitive target in mind so the initial steps are actually taken now.

   There it is, the SMART way to set goals. This is the What, Where, When, Why, and How of your goals. It is important to note that adding a Who component when planning your own success is risky, as any goal that isn’t completely in your control requires an extra level of accountability. Whenever possible, refine your goal to ensure that it is something you can accomplish without someone else’s direct influence.

   The Who element will definitely come into play when you are acting as a leader, and helping a team succeed. Whether the team is a family, business, or relationship.

   Once you have your 5-year goals, or whatever future time frame you are using to envision your ideal future, you can begin the process of breaking those goals down further into more short-term goals. These shorter term goals will act as mile markers on the way to your grander success. Mile markers that you can use to gauge and adjust progress along the journey.

   Success lies just down the road you’ve started on. You’ve drawn your road map. You know what needs to be done. Now go, take the first steps towards the future of your dreams.

How to Achieve Financial Freedom

  Success platitudes aside, we need to look into the practical methods of achieving success. As we live in a commercialized world, this involves setting our finances up to provide us the financial freedom required to pursue our life's goals. The key to financial freedom is to make one choice, once, and let the numbers do the rest.

  What does this mean? It means automating where your money goes, and ensuring part of that automation involves putting some aside for your future. These future funds should be invested in some capacity, as Jim Rohn puts it,

“The key is to engage in commerce, even if only on a part-time basis."

Jim Rohn

How to Achieve Financial Freedom Calculations

  By investing money, either in your own commercial activities, or by allowing others to use the funds to grow businesses (stocks, bonds, real estate, etc), your returns increase. Year over year, these funds can build into quite the foundation for financial freedom over the course of your life.

  Of course, the question often arises: how much should I save? Unfortunately, the correct answer to this is almost always “more”. And with that disheartening statement, often times people put off the investment decision until sometime in the future when their financial circumstances are better. But a dollar invested now is worth more than a dollar in the future.

  Let’s look at two friends aged 25, Francis and Jenny. Francis decides to put away $500 / month right now. He is afraid he can’t afford it, but as a Business Minded reader, also knows he cannot afford not to invest in his future. Jenny, on the other hand, says money is just too tight right now, and she’ll make up for it in the future. Starting when she is 35, she needs to invest $ 1,157.45 every month to have the same amount at age 60.

  By the time they plan to retire with their million dollars, Jenny will have had to invest $137,235 more than Francis. That is 165% more over the course of their lives. If the salaries of the two friends stayed the same throughout their lives, Francis would have had a far higher quality of life. Think of the extra vacations with his family, the extra date nights with his wife, the additional experiences he would have had with extra money to spend throughout his entire life to arrive at the same place financially at the age of 60.

   Financial Freedom is attainable for you, for everyone. And the cost is lowest when you start now, today.

  The trick to Financial Freedom is to start putting aside money. Think of the maximum amount you could afford to invest. Then increase that amount slightly. Invest that. You might feel the pinch that first month, but by the second month you will have adjusted slightly to accommodate to your new means of living.

  I gave this advice to one young mother recently. She assured me that there was no way that she could afford to put money aside for the future. I then presented her a situation, her child needed a couple hundred a month for a recurring doctors bill. How would she be able to afford that? She simply replied (rather indignantly), “easily, I just won’t go out for lunch as often. He’s my son, of course I’m going to provide for him.” Needless to say, we are all capable of living off just a little less, and saving just a little more for that future we dream of.

  So do this today, open a (low fee) investment account, and start putting a little aside every month. Your future self will be really glad you did. And that future self? That isn’t you at 60. That’s you every year until then, when you can spoil yourself a little knowing that your future is taken care of, by you. That is what it means to achieve financial freedom.

What is Success?

   Remember those tests at school? Not the sitting down in those cold hard plastic chairs, sharpened HB pencils, and writing examinations. No, those dreaded memories always were followed up with the joyous bragging or crestfallen sheepish jokes about the grades we all received. 50’s, 70’s 90’s, A’s, B’s, or even F’s. Allocations designed to grade us against our fellows. And therein lies the problem. Pass or fail were set criteria. But set by someone else.

   Achieving a passing grade was commonplace, even the “average” grade was a comparison against other people. People of different interests, different skills, different intellects. We spend the first 20 years of our life chasing after someone else’s definition of success.

   And then suddenly we are thrust out into the world. And if grade point averages meant next to nothing before, they mean even less now.

"I had failed, because I failed to define success."

   I can remember those hours of studying I never did. I remember buying the text books I never opened, the classes never attended. All because I defined “success” by someone else’s standard. Looking back now, all I did was fail. Sure, I took that passing grade, but that wasn’t enough. I had failed, because I failed to define success.

   Define success by what that means to you. If that is in an academic setting, perhaps that means success is achieving X% above, or below a pre-assigned “acceptable” level. What did that look like for me? I was disinterested in some of the mandatory language courses, so success for me was achieving a 70% or above. But math on the other hand, I could only consider myself successful if I achieved 83% or above. That was my definition of success.

   Financially that could mean making enough to support a family, own a property, take a vacation, dine at upscale restaurants. Physically this could be a certain weight or body fat percentage, a certain time on the track, the number of plates on the rack. In your career maybe it’s reaching a certain level, earning $ X amount, or having an impact in your field. No matter the category, this is your measure.

   So I implore you to sit down and reflect. Think about what is important to you. Set your own limits, decide what success and failure looks like to you. And then work like hell to make sure you achieve your successes.

How to Best Use a Company RRSP

How to best use a company RRSP

   If you are lucky enough to have a company RRSP and receive a year end bonus or commission payment, this question can pose quite the dilemma. When we are told about this option, it sounds like a no brainer. Invest in my retirement AND beat the tax man? Sign me up!

   But, as with most decisions in this financial world, things aren’t quite so simple. And what seems like the right decision now can actually cost you substantially in the long run.

   Let’s look into this scenario in a bit more detail:

   We’ll start with our hypothetical employees, John and Mary. Both make a solid salary of $ 65,000 /year, and both are receiving a $ 5,000 bonus for exceptional performance. John think’s he’ll beat the tax man this year, and he plans to put his entire bonus into his company sponsored RRSP. By contributing through payroll, he is able to avoid Income taxes that would otherwise be levied on his earnings.

(As a note: other statutory deductions are charged no matter the course of action. For the purpose of this example, we will ignore them since they are the same in both scenarios.)

   Mary, on the other hand, must be an avid BusinessMinded reader. She takes her bonus in cash, and therefore her employer deducts income tax (Federal and Provincial). This cash she invests in her own RRSP, and she dips a little into savings or takes a short-term loan to make sure she is also investing the same $5,000.

So far, the situation looks like this:

Tax Savings on RRSP

   John looks like he's ahead at this stage. They both invested the same $5,000, but Mary paid $1,500 in tax and therefore had to borrow $1,500 to make sure she invested the same amount. But, it's tax time. And that is where the playing field levels out.

   John has paid tax on his salary of $65,000, while Mary has paid tax on her salary and bonus, for a total Gross income of $70,000. John's RRSP contributions have already been considered in his tax payments, so when he files he reports income of 70,000, and RRSP contributions deducted from income of 5,000. This leaves his taxable net income of 65,000. Since John only paid income tax based on 65,000, his tax return is 0.

   Mary on the other hand, has paid tax on the full 70,000 that she earned. But she also invested 5,000 into her RRSP, giving her a taxable income of 65,000. She has therefore overpaid her income taxes, and can expect to receive a tax refund! At her marginal tax rate of 30%, Mary can expect to receive a tax refund of (70,000 - 65,000) * 30% = 1,500. This money she uses to replace her savings or pay off her loan. At this stage John and Mary seem to be on equal footing.

   But there's a catch. John has a typical company RRSP, maybe even a bit better than most, with only 2% management fees. Mary invested her RRSP in the same portfolio with a low cost provider, and only pays 0.75% management fees.

   At an annual return of 7%, Mary will outperform John by $389 in only 5 years, on this single investment. Take that timeline out to 25 years, and John will have only 75% of what Mary has saved. This could be the difference of retiring or still working.

   Important note! We did not take into consideration an employer RRSP match here. If one was available, the best option is to take full advantage of the matching contributions, and then put the rest in your lower cost (fees) RRSP portfolio.

   And now, armed with this new knowledge, you are prepared to make the best investments in your future!

5 Year Road Map for Success

Road Map for Success
What is your 5-year Success Road Map?

    Congratulations, You have arrived! This is as true now as it will be 5 years from now. Or 10 years from now.

But wait, where are we?

   The choices you make will determine where that destination is. We cannot change where we are right now, but deciding where you want to be in 5 years will help you align your goals and your efforts to take you in the right direction. We cannot speed up the passage of time, if you have a 5 year vision of your future, that future will come towards you. The only change you can make is the direction you face, so that when 5 years passes you will be standing where you envision it today.

   I’m not sure about the devil, but certainly the recipe for success lies in the details. Planning and mapping out your ideal future is essential for achievement. That is why all our courses start with a structured planning phase. When you map out the ideal future, you are able to make the small, incremental changes to your direction that lead you to a new path.

5-yr goal setting diagram

   Failing to plan for that target in the future will leave you walking down the same path. A slight course correction can easily change your future trajectory for your future self. What does this look like?

   Financially, you could automate some savings. Over time that automatic investment in your future brings you closer to your financial goals, closer to financial freedom. For your health, something as small as taking the stairs each day, or an evening stroll around the block. This moderate amount of movement can help you keep off those extra few pounds (kilo’s). And it could improve your heart health, allowing you to take an extra hike with your family and friends, enjoying those moments with growing children without gasping for air. A small health change today leads to laughter and memories 5 years from now, or 10 years from now, or for the rest of your life.

   In your career, this could be the extra few phone calls or meeting networking prospects, leading to new opportunities, more challenging and fulfilling work. Or a daily meditation or journal that helps keep your stress levels down in the rough times, and helps you more fully enjoy the blessed times. A small change will set you on a better path with your friendships, and most importantly your loving relationships.

   While it may not be doom and gloom if you fail to plan today, you certainly won’t be living your best, richest life without a plan and a dream to work towards.

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   In the overwhelm of our busy, bustling lives, it’s easy to push this dreaming and planning off for another day. But we must ask ourselves, what is the cost of doing nothing? To that I must answer, the cost is high.

   You can still achieve success. You can still reach your ideal destination.

5-yr goal #2

   But the road to reach your destination is so much harder if you wait. Postponing the “difficult” planning for your future only makes the road much, much steeper. And that extra effort on the steep road? That’s only the fraction of the cost that you experience as you make radical changes later on.

5-yr goal #3

   The real cost is the extra effort that you need to exert to make radical changes later on, plus the cost of missed opportunities throughout the delayed time. How much is an extra year of financial freedom worth? How about years of stronger relationships with friends, family, and loved ones? A stronger mind? Extra years of youthful vigor? More fulfilment from your career?

Do you have a 5-year plan?

   If so, what are your goals and aspirations? If not, take out a piece of paper, think about the important areas of your life and plan out where you would like to be in 5 years. The cost of inaction is too high to wait!

   I want to pass along a dare I was once challenged to.

The Dare to Dream.

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Share with us in the comments below, what is your Dream?

Which is better? RRSP vs TFSA

RRSP vs TFSA

   It’s tax time, which means we’re taking a much needed look at our current finances. While we’re looking at our finances, this provides a great opportunity to make adjustments for our 2019 financial strategy. Part of that strategy involves deciding where to invest. And that brings us to the often asked question, which is better; the Tax Free Savings Account (TFSA) or the Registered Retirement Savings Plan (RRSP)?

   As any personal finance expert will say, the answer is both. While that’s excellent advice, and I highly recommend investing in both if you have the ability, some of our readers do need to choose. This can be especially true if you have unused lifetime contribution room on either of the two investment vehicles. If that is the case for you, knowing how to determine which option is better can save you thousands of dollars in your lifetime.

   The RRSP is a tax-deferred investment, which means you should be able to contribute more now, because of the tax break. When you retire and start withdrawing the monies, you will pay tax at that time.

   When contributing to the TFSA on the other hand, these funds are invested on an after-tax basis. This means you have already paid income taxes on the funds that you invest. As a result, when you withdraw any money, including gains, these proceeds are tax-free.

Let’s look at this a little closer:

Example 1

Example 1

* Future Value is determined at an annual growth rate of 7.5% over 20 years.

   As you can see in Example 1, holding our tax rates constant, both options will result in the same after-tax proceeds. This isn’t an accident, as the two investments were designed this way! At this point, you might be saying, “Okay, this is a rather long way of saying that TFSA’s and RRSP’s are the same.” But wait! Before I lose you, let’s look at the numbers when taxes change. As is hopefully the case as you grow throughout your professional career, you’ll reach different tax brackets.

   In Example 2, holding all other assumptions constant, we’ll assume you plan a wealthy retirement, where you withdraw enough each year to be taxed at an average rate of 35%.

Example 2

Example 2

* We have held our growth assumptions constant, as a reminder: Future Value is determined at an annual growth rate of 7.5% over 20 years.

   In example 2 (above), the TFSA wins out. The taxes we paid when we first invested were at a lower rate than when we withdrew the funds in our retirement. What does this mean? If your marginal tax rate now is lower than you expect it to be when you retire, you would be better off using the Tax Free Savings Account (TFSA) to save money. In plain English, think early in your career when your annual earnings are lower.

   Now let’s flip the tax equation around. This would be the case if you were established in your career, and yours earnings reflect that!

Example 3

Example 3

* Growth rate 7.5% annually, 20 years.

   You guessed it! Registered Retirement Savings Plan (RRSP) investments win out when you pay more taxes now. These investments help reduce the taxes paid on your income at higher rates, and are taxed at lower rates when you withdraw.

   Let’s sum it up! If you earn in the same tax bracket that you expect to retire in, the investment options are the same. If you expect to have more retirement income than what you currently earn at, the TFSA is better. Conversely, if you are a high earner right now and plan to retire at a lower tax bracket, the RRSP is financially better.

 

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Other Considerations:

   It is important to note, this analysis does not take into consideration other factors. For example, if you are applying for Child Support, that could change the results of this analysis. Often the subsidies available are higher at lower income levels, meaning the RRSP could be the better option to reduce taxable income and qualify for higher child support payments/ assistance.

   There are also restrictions on annual and lifetime contribution limits for both RRSP and TFSA. We’ll cover those in other articles, so you can make better informed financial decisions.

   And finally, any employer matching changes the results too. As a general rule, if you are lucky enough to have employer matching for either RRSP or TFSA, it is almost always best to take full advantage of those programs.

Return on Investment, Your Investment

   Return on Investment, or ROI, is a fairly common term used when investing. Simply put, you desire a positive growth on monies invested over time. This could be interest income on a loan you made, your house increasing in value, or the stock market paying dividends and increasing in value.

 

   Now we’ll look at the other aspect of ROI, the ways we don’t commonly associate the term. I’m talking about the decisions that you make every day. The decisions that involve some level of financial, time, or energy commitment from you. These are all finite resources in everyone’s life, and while financial elements receive more attention, your time and your energy are even more scarce. And unlike money, when they run out, you can’t get more at the local store. It is this scarcity that drives the need for each decision you make to bring you a positive Return on Investment.

 

   Sounds great, right? But how does this actually look in yours and my daily lives? It’s heading to the gym when you’d rather skip today. It’s saying no to that extra beer or two to make sure you can get out of bed tomorrow without holding your head. It’s flicking the TV off a half hour early so you can read and improve your knowledge and communication. Or not putting yourself in the position to make an impulse purchase that you’ll regret later. It's checking in with the important things in your life to make sure you’re building on a strong foundation.

 

   It is these little successes every day that build into a long-term positive Return on Investment, your investment in you, your life. So go on, make the choices today that leave you wealthier, happier, and healthier tomorrow.