The Financial Goal Matrix
One of the most oft asked questions I receive during the Financial Self-Defense Training is “How do you determine what is an achievable financial goal?” When I begin setting goals many years ago, I had problems trying to set achievable goals. Goals need to be predictive and influenceable. Predictive means that if I take a specific action, the results will be predictable. Influenceable means that I have a high degree of influence over the action to be taken.
For example, if I wanted to lose weight, a predictive goal would be as follows. Reducing my caloric intake by 10% below the calories necessary for me to maintain a steady weight should reduce my body weight by 10%. A predictive financial goal would be “If I save $100 per week for 52 weeks, at the end of 12 months I should have $5,200. It is predictive that the action taken will result in the related result.
One of my ten rules for setting goals is “Do not set goals that require someone else to accomplish something so that you can accomplish something.” The less influence you have over a goal, the less certainty you have of ever achieving that goal. Therefore, you need to retain a high level of influence over your financial goals. (as a side note, using a financial planner reduces the level of influence you have over your financial goals.)
So, setting financial goals that are predictive and over which you maintain a high level of influence, have a greater chance of being achieved. However, these two qualities are not enough when it comes to financial goals. Financial goals also must be achievable. Achievability is dependent upon several financial realities and variables. For example, can a person earning an average salary become a millionaire? The answer is yes, but it won’t be as fast as a person earning a million dollars a year.
Most of us cannot change our financial realities radically enough to achieve the status of millionaire. That is why my rules for setting goals includes not setting goals that focus on changing the circumstances in which you live. Rather, set goals that change how you interact with the circumstances in which you live. Beyond behavioral changes such as spending habits and the use of credit, changing how you deploy your income can move you in the direction of being a millionaire.
In the Financial Black Belt’s Financial Self-Defense Training Series, you learn how to apply the discipline of martial arts to financial milestones that change how you interact with your circumstances. Part of that discipline includes knowing your limitations and applying the techniques in such a way as to produce the same desired effects. So, if you want to be a millionaire, but you do not make a million dollars a year, you must adapt your technique in such a way as to still achieve the desired outcome.
This thought is why I developed a financial goal matrix that can be applied to any person at any income level at any age. Financial management is about numbers and numbers are driven by mathematical formulas. That is the beauty of the financial goal matrix. It uses a person’s financial realities to calculate the financial targets that are predictive and influenceable.
The key inputs to the matrix are the person’s age and his or her annual income. Then, based on mathematical formulas, the matrix calculates financial targets based on six different criteria producing nine different targets.
This matrix gives Micro, Macro, Short-Term, Mid-Range, and Long-Term targets (essentially capturing the Pay-Period, Quarterly, Annually, Three Year and Ten Year goal structure). To adjust the targets, the goal-setter only needs to change his or her age and or income. When a person receives an increase in salary, or when he or she has a birthday, he or she just enters that new salary (or age) into the appropriate cell and the financial targets adjust.
Let me take a moment to explain the table. The inset assumes the following: the person setting the financial goal is 43 years old and earns $63,295 annually. If he or she is using the O.N.C.E. strategy (which is detailed in my first book Simple Wealth Building Strategies available on Amazon) and has paid off his or her debt, this simple tool will help retain focus on building wealth. The three titles found on the left side of the table stand for the following.
UAW – Under Accumulator of Wealth
AAW – Average Accumulator of Wealth
PAW – Prodigious Accumulator of Wealth
Borrowing from the best-selling book, The Millionaire Next Door, I decided to develop a tool that identifies financial targets to help me determine my financial goals. I developed this tool to provide some guidance on the financial targets one needs to pursue in order to move from one accumulator to the next and from one level to the next.
There are five different tables, but I want to focus on the three different tables which account for the following financial realities. In the 1-year goal, targets include all contributions to 401k, HSA, IRA’s, brokerage, savings, and money market accounts plus any realized capital gains and interest / dividends for a 1-year period. (Short-term goals should be projected so that the strategy is predictive and influenceable.)
The 3-year table, the targets are a measure of a three-year measurement that can be used as a rolling three years. In the 3-year goal, targets include all contributions to 401k, HSA, IRA’s, brokerage, savings, and money market accounts plus any realized capital gains and interest / dividends for a 3-year period. (Mid-range goals should be projected so that the strategy is predictive and influenceable.)
In the greater than 10-year table, the targets include all contributions to 401k, HSA, IRA’s, brokerage, savings, and money market accounts plus any realized capital gains and interest / dividends for a 10-year period. (Long-term goals should be projected so that the strategy is predictive and influenceable.)
When you receive your matrix, you can use it as a comparison tool for where you currently are in your journey and to establish your new financial goals. If you are interested in learning more, I offer Financial Self-Defense Training in the form of a seminar that teaches all of the belt levels and financial milestones. If you are interested in scheduling a seminar, please make note of that in your email.
The purpose of this matrix is to give the user solid financial targets that he or she can structure his or her financial goals around. I will just discuss the 1-year goal table, but the same principle applies to all targets regardless of the time duration.
To achieve the goal of a LOW-UAW the person would only need to save $3,220 in all financial accounts as outlined above (401k, HSA, IRA’s, brokerage, savings, and money market accounts). To advance to the LOW-AAS, that person would need to save at least $3,936 in those accounts annually. If the person saves at least $11,091 in all accounts, he or she would move into the LOW-PAW level.
The 1-year table is a goal to achieve each year. The 3-year and 10-year tables are accumulation target for wealth building. If a person is saving and investing at the HIGH-PAW level, which is $19,856 annually, he or she would accumulate $59,568 before interest, dividends, and capital gains. This would mean that a person would achieve the level of HIGH-AAW in three years. A person saving and investing at the HIGH-PAW level would achieve the LOW to MID-AAW in ten years.
Based on that, the person has to stay focused and diligent about his or her financial behaviors to achieve levels above those mentioned. Remember, as the person gets older and receives pay raises, his or her targets will adjust. The financial matrix strategy is a moving target that provides the goal-setter with constant stretch goals.
I find this matrix constantly challenges me to think beyond the present. It has driven me to learn how to trade option contracts and capitalize on the arbitrage created by mergers and acquisitions. It has provided me a level of stability in my financial behaviors because I am constantly challenged to find new sources of income through passive means. I hope the advent of this strategic tool will encourage you to do the same