Executive Summary
It is viewed as almost common wisdom: the key to success is to set clear goals so that you can achieve them. After all, if you don't know what your goals are, you can't determine the path to reach them. Financial planning itself is rooted deeply in this philosophy, given its significant emphasis on goals (whether for retirement, college, legacy, or something else) as a foundational step in the financial planning process. Yet as I reflect on my own financial and business success over the past decade, I am struck by a startling realization: not only did I not set any goals for myself, but I'm quite certain that if I had, I would be less successful today. Because it's not about goals, really. It's about habits.
Today's blog post is inspired by a recent conversation I had about financial and business success, and what it takes to succeed. The discussion initially revolved around the classic wisdom of the importance of setting goals and the role it plays in the financial planning process. Yet as I reflected on my own experience, I realized that all of my success stems not from setting goals, but instead from establishing good habits.
Perhaps some examples might help. As many of you know, I am a bit of a learning junkie, with an almost literal "alphabet soup" of letters after my name signifying more than half a dozen different designations and two Master's degrees. Because of this, I'm often asked "how many I'm going for" or "why I set a goal to get so many." Yet the answer is very simple; I don't have any such goals. I have a habit of making myself learn something new, every day. It turns out that when I repeat this habit, day after day and year after year, but enrolling in programs that structure and facilitate my learning, I end out with a whole bunch of designations. But the goal was not designations. I just made learning a habit. The designations and degrees are what I accomplished while I was on the journey.
I find this similarly true in the financial realm. I have been relatively successful at generating savings for my retirement and other goals, yet most of my savings has not been driven by my goals, per se. Notwithstanding my work as a financial planner, I have not sat down and set a retirement goal for a certain standard of living, done the math, determined the required savings amount, and then set my savings level at that target. I've simply made it a habit to live modestly, spend far less than I earn, not overspend on where I live and what I drive, and I have money left at the end of the month that gets saved. Ironically - yet perhaps, this is the point - as a percentage of my income/salary, this actually leads me to save more than I probably would have if I just targeted a retirement savings goal.
And perhaps my tendency to not set goals is best reflected in my business activity. Seven years ago, I had never given a speech on a podium, and had never published anything I'd written. Now my primary income is from professional speaking at conferences, and paid subscriptions to my newsletter, in addition to the work that I do for Pinnacle Advisory Group, New Planner Recruiting, and more. If you had asked me then to set a goal about what I'd be doing at the turn of the decade, speaking and writing would not have even made the list. In fact, if you had asked me just 4-5 years ago as this activity was starting for me, how much I would be writing, how many speeches I'd be giving, how many conferences I'd be attending, and what my business would be earning for all of this activity, there is no way that I would have predicted the extent to which the business has grown. In other words, if I had set a goal, the goal would have been lower than what I could achieve, and if I had in fact set that goal, I would have likely "relaxed" once the goal had been reached, and today I'd actually have a less profitable and successful business. Instead, I didn't set goals; once again, I just tried to establish good habits, of speaking to the media often, of publishing on a regular basis, of developing new content as much as I can, and I've let the journey take me where it will.
Does that mean we should never set goals, and just let the journey take us where it will? Not exactly. I do still think there can be some value in establishing goals... with an important caveat. Don't let the goal BE the end point. The purpose of setting a goal is to determine what habits you must establish that will lead to success. Ultimately, though, it's the habits that actually bring about the success, and once you're on a journey supported by the right habits, goals just limit the outcome.
And again, I find this is as relevant to many aspects of financial planning, as it is to the business and personal life. Setting a goal for savings should be as much about having good financial habits - like proper use of credit and debt, living with a modest home and car, and spending less than you earn - as it is actually doing the math to determine what monthly amount you must save in order to retire 10, 20, or 30+ years from now. It's hard to be motivated by immediate savings for far distant goals, especially when there's so much uncertainty in the path that it's hard to be entirely accurate anyway. It's much easier to feel rewarded for engaging in good habits that you know will support long-term success and leave you better prepared to deal with an ever-changing journey.
So what do you think? Is goal-setting really a critical step to success? Or is goal-setting just about determining the habits you need to follow to get on the right path? Am I just "strange" that setting habits works better than setting goals? Does this seem relevant for any of yours clients, or perhaps some clients more than others?
I think that what’s right depends on the person. Habits work for some, goals for others.
I like Chris Brogan’s 3 words approach (http://www.chrisbrogan.com/my-3-words-for-2011/) because it’s flexible. It doesn’t lock me into goals or resolutions that become outdated.
Michael, it’s an interesting way to think. I set very few goals and limit them to areas where I feel that major focused changed is either needed or desirable. You and your readers might find Leo Babauta’s thoughts from his Zen Habits blog interesting in this respect.
See http://zenhabits.net/no-goal/
I have a different perspective on goals . . .
Rather than the traditional goal setting process, whether for finances or other areas of life, I think an improved approach is to set a range of goals instead of a single number or destination.
In the context of planning, I ask my clients when they would IDEALLY like to retire as well as what an ACCEPTABLE retirement age would be. I follow this process for each and every goal a client may have.
This creates a different and much improved goals conversation with clients, both up front and ongoing. As a result, instead of treating goals as “buy and hold” or “passive”, I focus on “active” goal management and passive investing.
Let’s say the market goes up 15% in the next 12 months. Instead of telling clients to “stay the course” we instead discuss what goals we can improve. Maybe we can now consider retiring earlier or spending more in retirement or purchasing a 2nd home sooner than originally planned.
Of course, when the market drops, we also discuss goal concessions like working longer, spending less, and/or saving more, etc.
From my perspective, I don’t think I could ever be too goal-focused.
Great, thought-provoking post.
Goal based planning works for simplier problems. goal-based planning is mental malpractice for complex or hyper-complex problems. As you know, Michael, I suggest Scenario-based planning. Planning is seen as Preparation vs Prediction. To Prepare you must rehearse. Rehearsal is thru practice. Outcome is Resilance vs. “the path” or Fidelity’s vision in their follow the green arrow. Makes for entertaining simplicity…but for complex problems (trade-offs) most clients want a set of paths so to speak. They (all) clients should have rehearsed the last 2 years of market returns (general declines) and spending expectations (spending more or less). The problem is that most advisors equate goal-setting with goal-attainment as the measure of both conversations and calculations for planning. The “what’s your dream” so I can help you set goals to OBTAIN those outcomes. This misunderstanding and application of the wrong type of problem/ with type of process mismatch leads to poor performace (Micheal Hammer)So for example (if planning consists of game theory and decision science)planners and clients would focus on preparation, rehearsal and practice…so the type of tools, methods, and underlying theories of planning…could be measured by the client saying “could we rehearse a few of those strategies again?”…or like a great (any for that matter) sports team…conduct walk thrus…not just chalk talks or walk talks. Client, Advisors and players on a team…need the experience of physical, intellectual, emotional “rehearsals” for “preparation”. Today’s football teams do not always go to the line of scrimage with just one play (goal)to implement. The offense now make adjustments based on what they think the defense is offering them. Let’s make planning’s value the ability to be prepared to audible retirement planning based on what the defense “gives us”.
Just saying…Dr.D
Michael:
There are so many variables that one must constantly redo the plan. One must set goals like “have the 401k at X$ is 5 years” and then see how close one came to the goal so as to see if they are on track. Consumers need to think like a business, so setting goals is good. One may feel guilty about coldly departing from typical excessively relaxed human behavior and becoming a strict goal disciplinarian but thus is the rice to pay to be successful.
Habits – that is very insightful. It makes me wonder – what are winning habits; habits that increase the probability of success? And can they be listed, categorized? And the next question: How can they be obtained, if you don’t already have them? I think that focusing on habits can be very helpful.
John
I used to become frustrated that I had difficulty eliciting goals from clients. Fast forward to today, and I realize that the great majority of my clients are living within their means, have diverse revenue streams, apply themselves well to problems and in general are on a path to fulfillment. I have personally not used goals in years, for the reason that Michael suggests. I found goals clarifying, but I did not need clarity. I just need the proper frame of mind, the proper preparation and the oomph to get to where I needed to go. Looking back, maybe i already had the inputs for goal attainment and the goal took care of itself. I have never found goals useful beyond the desire for an end state, and even that is malleable according to progress. The apparent conflict is this: How do we set on a path with a force and direction and yet remain “in the moment” open and receptive to a variety of inputs. For me, I find the key to be some inner filter which lets me separate signal from noise in the myriad daily encounters I have. I’m not on a highway – I’m in a hologram.
I think the necessity and/or precision relating to goal setting depends on the person and issue. A goal of saving $1,000/mo, for example, is more meaningful than a goal of having $1,000,000 in 10 years. Saving $1,000 is a habit one can control, reaching a goal of $1,000,000 focuses a person on something they (a) can not control and (b) may or may not be adequate when they get there depending on a variety of other variables they can not control.
Alternatively, I do think that glidepaths or trajectories are very important, but it is even more important to make sure a client understands what that glidepath means on a relative basis. For example, people didn’t have to save money in the 1990’s because markets took care of it. Whether they saved or not, they hit their investment targets. When the house of cards fell, however, they didn’t look so hot.
In the last decade, I suspect many folks fell quite short on an absolute basis, however, they may actually be in a better position on a relative basis due to it being a period of relatively low inflation. Returns averaging 8% mean something completely different during a period of 2% inflation versus a period of 4% inflation.
I tend to agree that behavior is far more important than specfic measurement against benchmarks. If we continue in a low inflation environment over the next decade, we do not need big returns to keep up with our optimal glidepath. However, if inflation creeps upward, returns similar to this last decade may not suffice.
Habits and behavior drive success, and I submit that our goal-setting ought to be contstrained to that which they can control.
Joe Pitzl, CFP®
Good post (and thanks to Carl Richards for directing me here).
I don’t really view goals or habits as an either/or relationship … it’s more of a both/neither relationship. My goals dictate my habits, and then my habits end up refining my goals – and sometimes altogether replacing them with new ones.
A few years ago I created a personal document that I titled “Drilling to Success” which was a subterranean picture of the ground with a drill burrowing down in. The ground level listed my (then) 6 career goals, under that listed 8 characteristics/habits needed to reach them, and under that listed 5 specific daily tools I use to better improve those habits.
That approach has worked well for me, and still allows me to aspire for more and to refine my goals .. giving me a theoretically unlimited ceiling of achievement.
In my mind, goals are vague states of being. For example, I want to be financially independent. How that happens needs flexibility and can be achieved in many ways. For me, objectives then set the tone for how this individual might approach that.
I have not considered habits before but this intuitively makes sense since the right behaviours are needed to meet the end goal. Personally, I find too much structure restrictive, but I guess it depends on what works for the indivudual.