“If you fail to plan, you plan to fail” is one of those quotes whose authorship is hard to trace, which is why it gets attributed to famous people – in this case Franklin or Churchill. The oldest sources, however, point to a 1979 Canadian newspaper, The Lethbridge Herald, and to Ron Watmough, or to the motivational author Alan Lakein. Whatever its origin, the quote neatly captures the essence of planning: if you don’t plan, you’re planning to fail. The same principle works in finance too.
According to the academic definition, planning is a process that consists in deliberately setting directions for action and making decisions based on goals, facts and well considered judgements (Koźmiński, Piotrowski, 2000, p. 179). A plan in itself holds little value. It only takes on value when it is carried out.
So why plan? Why sit with pen and paper over some plan that might turn out to be worthless? After all, you could just get straight on with something that delivers some value… Contrary to appearances, though, a good plan is priceless. Above all, it gives you an initial check on whether what you want to do is actually feasible. It lets you think things through more carefully and make conscious choices, which usually translates into better results.
When we plan, we make mistakes on paper; those cost us less and are easier to put right than mistakes made in real life. Before you find out how to reach your financial goals, though, you first have to set them.
A task for you – create a story
If you enjoy watching films or series, making a plan can turn into great fun for you. Quite simply, one day (or evening), instead of turning on the TV and watching the story of some fictional hero, try your hand at being the author of a story. In this story, the main character will be YOU.
Imagine that 50,000,000 PLN has just landed in your bank account. What will you do at that moment? And then what? And after that? Create a story that accounts for EVERY single thing you do. Minute by minute, hour by hour, day by day. Let the story span five years in total.
This is a task from Brian Tracy’s motivational book (Tracy 2016). In every spare moment I lost myself in dreaming up the next scenes of my own story. It really was great fun. The most important thing, though, is that thanks to this story I discovered my own goals – what I truly care about and what I really want from life. And that made it far easier for me to set my financial priorities.
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A goal is an outcome or state you strive for. A financial goal is its financial aspect. If your goal is to have a house outside the city, a loving life partner and three children, then your financial goal is to provide the money needed to make all of that happen.
That’s why it’s wrong that so many people associate financial planning with restrictions, denying themselves things or asceticism. The point of planning your finances is to make it possible to live the kind of life you want to live. Saving toward your financial goals is therefore not a sacrifice, but a way of focusing on what is genuinely important to you.
An example of how important long-term financial goals are
Artur, Grzesiek and Darek are friends from university. Artur knows what he wants from life, and he wants to have a good time now, in his late twenties. He reckons that in old age memories will do him just fine instead of money. He planned his finances around having fun, and financed his adventures with loans that he will be paying off in the years to come.
Grzesiek, so as not to fall behind, did the same. Together, then, they had a great time on borrowed money, without a thought for what would come next. The difference between them was that Artur thought everything through carefully and made a conscious decision, aware of the costs and the consequences. Grzesiek, on the other hand, never stopped to think about what his long-term financial goals were.
If he had met up with Tomek and, like Darek, asked “what exactly is this financial planning thing”, they would quickly have started talking about what Grzesiek wants from life. And he wanted parties, but he also wanted to buy himself a good car at 30, and then take out a mortgage with his future partner and buy a flat where they could raise their two children.
He wanted to give his children a good start in adult life. He wanted to build a house and then live with dignity in retirement. He didn’t know that what he was doing would make reaching the financial goals he ought to have set himself so hard – and perhaps even impossible.
Grzesiek blew off financial planning and didn’t achieve half of what he truly wanted. He had such a good time before turning thirty that, later on, he was no longer able to put money aside for the “dignified” retirement he’d imagined; he had trouble with his loans, never built the house he longed for, and couldn’t help his children when they went off to university.
In the final reckoning, this brought more unhappiness than happiness into his life. So I’d suggest pairing financial planning with the idea of “happiness” rather than “restrictions”. Setting financial priorities protects you from spending money on things you don’t actually want.
Types of financial goals
Short-term financial goals
Short-term financial goals are goals we want to reach within the coming year. They are most often the goals that require a smaller financial outlay and are easier to achieve in a short space of time. Examples of short-term financial goals include:
This year’s holiday: Saving up for a holiday, which can be a relaxing reset from everyday life.
Buying a new phone: Replacing an old device with a new model can be a goal that motivates you to save small amounts regularly over several months.
Paying off small debts: Clearing minor debts, such as credit-card debt, small loans or medical bills, can improve our financial situation and free us from extra interest.
Medium-term financial goals
Medium-term financial goals cover plans for a period of one to five years. These are goals that require larger financial outlays and more detailed planning than short-term ones. Examples of medium-term financial goals include:
Saving for a deposit on a mortgage: Buying a home requires putting together enough capital for a deposit, which usually comes to between 10% and 20% of the property’s value. Saving regularly toward this goal over several years can make getting a mortgage significantly easier.
Buying a car: When planning to buy a new or used car, it’s worth considering saving toward this goal over several years, so as to avoid taking out large loans or credit.
Paying for studies: The costs of education – such as tuition, books, accommodation and other expenses – can be considerable. Saving toward this goal over several years can help reduce the financial burden associated with taking out student loans.
Long-term financial goals
Long-term financial goals are goals we plan to reach over a span of more than five years. These are often the most ambitious financial goals, the ones that call for long-term commitment and systematic saving. Examples of long-term financial goals include:
Retirement: Financial security in old age is one of the most important long-term goals. Pretty much everyone wants to ensure a comfortable life once they’ve finished their working years.
Buying a house: The dream of owning your own home often takes many years of saving and planning.
Providing for your children’s education: The costs tied to children’s education can be considerable, especially if we plan to send them to reputable universities or to help them start adult life on the right foot.
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At the root of financial goals lie our values. These are the fundamental beliefs about what is important in life (Garman 2002, 35). Each of us values different aspects and areas of life differently. For different people, things such as education, spiritual life, health, career, family, friendship, entertainment or surroundings can carry a different value.
For one person family matters most, for another it’s their career, and for someone else it’s entertainment. No one can be judged on the basis of their values – everyone has their own and has to honestly uncover them for themselves. Saving toward financial goals that line up with your values will, after all, give you a great deal of satisfaction.
It’s very important to distinguish between a given person’s values and the values commonly prized by society, that is, social norms. For example, not everyone wants to devote their whole self to their children. While society prizes this value far more highly than, say, a passion for collecting precious stones or a devotion to animals, it’s important that planning (financial, life, career) should rest not on social norms but on our own values.
We express our values in various ways: if you value something more, it’s easier for you to spend money on it or give it your time. So if you sense that your household budget contains expenses you don’t feel comfortable with, it’s worth thinking more deeply about whether you haven’t built your financial goals on the wrong values.
You can also look for your values in the things that give you pleasure. Another clue can be the environment you spend time in or feel good in. Or the topics you talk about.
A very good tool for helping you discover your own values is the Wheel of Life (also called the Wheel of Balance, or Circle of Life). The version presented here divides life into 8 areas. This is just one example of how to break it down. If you feel that life is made up of different areas, you’re free to change it however you like.
The SMART method
The SMART method is a popular technique used for setting goals, both in your professional and personal life. The acronym SMART comes from English and is made up of five key elements that help you define and achieve goals precisely. It has, however, also gained a Polish translation. Let’s start, though, with the original.
S – Specific
A goal should be clearly defined and concrete. Avoid vague statements; instead, focus on the details that describe exactly what you want to achieve. Example: Instead of “save money”, set the goal “Save money for an emergency fund”.
M – Measurable
A goal should be measurable, which means you have to be able to track progress and judge whether the goal has been reached. With financial goals, though, this aspect is obvious, because financial goals always have to be expressed in money. Example: “Save 10,000 PLN for an emergency fund”.
A – Achievable
A goal should be achievable, that is, possible to reach given your available resources and constraints. Our example goal is achievable, as long as we set an appropriate monthly amount that we’re able to put aside.
R – Relevant (significant, in line with your values, meaningful)
This word is actually very hard to translate into Polish, because it has no direct equivalent. It means that a goal should be relevant, that is, it should bring about changes in your life, while at the same time being consistent with your values and long-term plans. Building an emergency fund matters a great deal, so our example is relevant.
T – Time-bound
A goal should have a set deadline, which helps maintain motivation and accountability. Example: “Save 10,000 PLN for an emergency fund by the end of the year” has a clearly defined deadline.
The Polish SMART acronym
The Polish translation introduces one difference. It replaces Relevant with Ambitny (“Ambitious”): Specific, Measurable, Ambitious, Achievable, Time-bound. Generally, both translations are good, but the best is a combination of the two. For a goal to be SMARRT, it should be Specific, Measurable, Ambitious, Relevant, Achievable and Time-bound.
Setting financial priorities
Once you know your values, you can start setting financial priorities. Write down both your short-term financial goals, such as a holiday in Cuba or buying a Lidlomix (a budget kitchen robot), and your long-term ones, such as retirement or building a house. Remember to make your goals SMARRT. Write down the things you genuinely care about, because saving toward financial goals takes strong motivation. For now, don’t worry yet about how you’ll achieve them; what matters at this stage is defining what you want from life.
Of course, keep a certain dose of realism. Setting financial priorities is not about having your head in the clouds. Managing your personal finances has to be based on reliable data, so unless it’s a burning desire of yours – one that will give you the strength to work two jobs – don’t write down that you want a custom-built Lamborghini. A household budget is not a wish list; it’s a financial document based on your income and expenses.
Clearly setting financial priorities is very important, because it shapes the whole of how you manage your personal finances. Sometimes we want to achieve so much that we struggle to choose what comes first. If we put too many goals into the plan at once, we may end up achieving nothing at all. That’s why you have to assign your goals financial priorities.
How do you do it? You can assign categories (A, B, C, D, or I, II, III), or describe in words how you rate the priority of a given goal. There are goals that are non-negotiable, and there are ones whose pursuit is conditional. And then there are side goals, ones that aren’t quite as important. How you set your financial priorities is down to your own way of communicating with yourself. Use your own style and your own language, so that they’re clear and understandable to you.
How to reach your financial goals?
Reaching financial goals requires drawing up a concrete action plan. That involves setting realistic goals, creating a credible household budget, saving regularly toward your financial goals and monitoring your progress. We’ll discuss all of these things later in the Financial Primer.
For now, what matters is writing down both your long-term and short-term financial goals. Don’t set yourself up, though, to believe that the plan you draw up is sure to be carried out. Stay flexible and ready for changes should unforeseen circumstances arise. Managing your personal finances is an ongoing process, one that calls for responding to change.
I do have some good news for you, though: financial planning has one significant advantage over planning other areas of life (such as your career). Long-term financial goals are interchangeable. Money is a universal carrier of value, so for 250,000 PLN you can buy either a good car from a showroom or a studio flat.
What am I getting at? If you’re saving for a car and, 10 years from now, your values change, you can calmly rename the “Lambo fund” to the “little-flat fund”. That means changes in life don’t undo the energy and determination you’ve put into saving toward your financial goals. Money set aside for one specific goal can be redirected to a completely different one, if that’s what you wish.
Financial success and standard of living
Reaching financial goals is seen as financial success. The definition of financial success, however, isn’t limited solely to achieving financial goals; it can also be tied to reaching a particular standard of living.
A standard of living is the level of life a given person wishes to reach, to maintain once they have reached it, or to regain if they have lost it. The level of life is made up of all the economic conditions we live in (our income, social status, access to goods and services). In simpler terms, it’s the level of life at which we feel good and comfortable.
Each of us can have a different standard of living. Someone needs only enough not to worry about financial problems and to keep their household budget slightly in the black. Someone else would like to have enough to pursue their passions, meet their short-term financial goals and afford appealing things, such as a games console, while yet another person would like to have a lot. We can therefore distinguish three basic standards of living (Garman 2002, 5-6):
Financial security
Financial security is a standard of living at which a person is able to satisfy all their needs and some of their wants. A need is a state in which a person feels the lack of something (e.g. hunger – a lack of food; loneliness – a lack of company; boredom – a lack of entertainment). A want, on the other hand, is a state in which a person would like to have something (e.g. a doughnut, a close-knit group of friends, a new coffee machine).
We have to satisfy our needs in order to function; we want to satisfy our wants in order to be happy. The idea of happiness is permanently woven into the way we manage our personal finances.
Financial freedom
A higher level of life is financial freedom. A financially free person has enough financial resources to satisfy all their needs and the vast majority of their wants without having to work. In other words, they have assets that generate enough monthly income (e.g. interest) that they don’t need to work to maintain their standard of living.
Financial security can mean being able to satisfy all your needs and some of your wants. Financial freedom means having enough money (or a kind of passive income) to satisfy not only your needs but also your wants – and without doing any work.
Wealth
The highest standard of living, in turn, is wealth. It’s the standard of living that allows you to satisfy all your needs and all your wants. Financial freedom is not the same as wealth. Someone who is wealthy may be financially free, but doesn’t have to be. Someone who is financially free may be wealthy, but doesn’t have to be.
If maintaining a given person’s standard of living costs 6,000 PLN a month, they will achieve financial freedom by owning two or three flats to let. Or, alternatively, 800,000 PLN in corporate bonds, or one and a half million PLN on a deposit account.
Wealth requires considerably higher income and greater capital. Renting a luxury apartment (or the instalment on a loan to buy one), three cars including one with a driver, daily lunches in restaurants, membership of golf and fitness clubs, fine wines, champagnes, 70-inch televisions, trips to exotic places… Without a monthly income running into the tens of thousands of PLN, or really large capital (around a dozen or so million PLN), you can’t talk about wealth.
You can never have too much money – if need be, you can give it to others – yet not everyone needs wealth. For most people the standard of living is financial security, and reaching it can be a financial success for someone. Like values, financial success is an entirely individual notion.
Summary
You now know what values, dreams and financial success are. The definition of planning quoted at the start should now seem clearer and easier to grasp:
Planning is a process that consists in deliberately setting directions for action and making decisions based on goals, facts and well considered judgements.
Planning is about reaching goals. Those goals are reached by making conscious decisions and steadily moving toward them. The goals themselves, in turn, are entirely subjective and represent a compromise between a given person’s values, dreams and standard of living. Whether they are to be ambitious and aimed at fulfilling dreams, or merely to provide financial security, is up to you.
You have to sit down on your own, lie down, go for a walk and discover what will give you happiness. This is the first step in the financial planning process. After all, you have to know what you care about before you start planning how to reach your financial goals.
In brief
Financial planning is crucial, because without it we risk failure, as the quote “If you fail to plan, you plan to fail” neatly illustrates. A good plan checks whether your intentions are feasible, lets you make conscious choices and avoid mistakes. Various exercises can help you create a financial plan, and they can turn into good fun too – for instance, by imagining how we would spend a large sum of money, which helps you uncover your own goals and priorities.
Financial goals are concrete plans for the future, covering short-term (e.g. a holiday), medium-term (e.g. buying a car) and long-term goals (e.g. retirement) alike. Saving toward financial goals doesn’t mean sacrifices, but focusing on what really matters. At the root of financial goals lie your values. Don’t forget to assign them financial priorities, either.
The SMART method helps you set financial goals by making them Specific, Measurable, Achievable, Relevant and Time-bound. Thanks to this, you can pursue your financial plans effectively, which leads to financial success and the standard of living you long for – whether that’s financial security, financial freedom or wealth.
Concepts
Planning, goal, financial goal, short-term financial goal, medium-term financial goal, long-term financial goal, values, social norms, Wheel of Life, SMART, SMARRT, financial priorities, financial success, standard of living, level of life, financial security, financial freedom, wealth,
References
1. E. Garman, R. Forgue, Personal Finance, Mason, OH 2002 (7th ed.).
2. A. Koźmiński, W. Piotrowski, Zarządzanie – teoria i praktyka, Wydawnictwo Naukowe PWN, Warszawa 2000.
3. B. Tracy, Cele! Zdobędziesz wszystko, czego pragniesz, szybciej, niż myślisz, One Press, Gliwice 2016.
