Financial Goals and Debt
I’ve never really set financial goals for myself, but I do find the goals others set for themselves interesting. I used to make projections about future savings based on my income and spending to see when I’d have enough money for a house down payment or a car, but this is different from setting goals. One thing that is usually missing from people’s financial goals is a goal related to overall debt.
My day job is related to online security. I spend a lot of my time looking for ways to get around security systems so that we can make them better. So, when I look at someone’s financial goals, I immediately look for easy ways to achieve the letter of the goals without meeting the true spirit of the goals. Once we see the problems, it’s possible to make the goals more robust.
Krystal Yee at the blog Give Me Back My Five Bucks posted her 5 financial goals for 2013. Her first goal to “earn $85,000 to $90,000” isn’t easily gamed. The fourth goal to “diversify my investments” away from TD’s e-series mutual funds is more about learning than financial sacrifice, and deciding if she has met this goal is a personal matter. One thing I would say, though, is that she is misusing the word “diversify”. Many of the e-series mutual funds are wonderfully diversified. Buying other funds that invest in the same asset classes won’t improve diversification much, if at all.
The remaining 3 goals to “Put an extra $2,500 onto the mortgage,” “Save $16,000 in my Retirement Portfolio,” and “Start contributing [monthly] to charity” can be met trivially by just borrowing $20,000 or so on a line of credit – no real financial sacrifice required.
Of course, when I say it like that, it’s easy to object. Who would be foolish enough to just borrow the money for their financial goals and then delude themselves into thinking that they’ve met the goals? Certainly not Krystal. When the cheating is this blatant, I agree that almost nobody would be this foolish.
However, as David Chilton points out in his excellent book The Wealth Barber Returns, “Even some of my financially responsible colleagues have built up huge balances on their lines of credit, half the time without fully realizing it was happening.” It is very easy to not notice a line of credit balance creeping upward.
Maybe Krystal won’t make the mistake of meeting her financial goals with borrowed money, but many people do. When people set their goals, I think they should explicitly include one related to overall debt. Some examples are “keep my line of credit at zero and don’t create any new debts” or “reduce my line of credit balance by $3000 and don’t create any new debts.” (You might have noticed a pattern in those two suggestions.)
Dealing with debt can be like trying to crush a balloon with your hands. When one debt shrinks, another one pops out somewhere else. Only by carefully monitoring debts as well as assets can we know if we’re making financial progress in our lives.
My day job is related to online security. I spend a lot of my time looking for ways to get around security systems so that we can make them better. So, when I look at someone’s financial goals, I immediately look for easy ways to achieve the letter of the goals without meeting the true spirit of the goals. Once we see the problems, it’s possible to make the goals more robust.
Krystal Yee at the blog Give Me Back My Five Bucks posted her 5 financial goals for 2013. Her first goal to “earn $85,000 to $90,000” isn’t easily gamed. The fourth goal to “diversify my investments” away from TD’s e-series mutual funds is more about learning than financial sacrifice, and deciding if she has met this goal is a personal matter. One thing I would say, though, is that she is misusing the word “diversify”. Many of the e-series mutual funds are wonderfully diversified. Buying other funds that invest in the same asset classes won’t improve diversification much, if at all.
The remaining 3 goals to “Put an extra $2,500 onto the mortgage,” “Save $16,000 in my Retirement Portfolio,” and “Start contributing [monthly] to charity” can be met trivially by just borrowing $20,000 or so on a line of credit – no real financial sacrifice required.
Of course, when I say it like that, it’s easy to object. Who would be foolish enough to just borrow the money for their financial goals and then delude themselves into thinking that they’ve met the goals? Certainly not Krystal. When the cheating is this blatant, I agree that almost nobody would be this foolish.
However, as David Chilton points out in his excellent book The Wealth Barber Returns, “Even some of my financially responsible colleagues have built up huge balances on their lines of credit, half the time without fully realizing it was happening.” It is very easy to not notice a line of credit balance creeping upward.
Maybe Krystal won’t make the mistake of meeting her financial goals with borrowed money, but many people do. When people set their goals, I think they should explicitly include one related to overall debt. Some examples are “keep my line of credit at zero and don’t create any new debts” or “reduce my line of credit balance by $3000 and don’t create any new debts.” (You might have noticed a pattern in those two suggestions.)
Dealing with debt can be like trying to crush a balloon with your hands. When one debt shrinks, another one pops out somewhere else. Only by carefully monitoring debts as well as assets can we know if we’re making financial progress in our lives.
I find the concept of setting life goal in financial terms misleading as it leaves so many other life variable out of the equation. Having said that, the only sensible way to set a financial goal is in terms of long term wealth. Guess, this is the same as your last paragraph statement.
ReplyDeleteThat's a good argument for a general debt aversion, which is a large part of how we stay on track. Our only debt is mortgage-related and with a steadily declining balance we know we're not abusing it. As long as total interest costs remain low (after refinancing last year they should be under $6700 for this year) that leaves us free to aggressively pursue other goals such as building up the investment portfolio.
ReplyDeleteEarnings can be easily gamed if you have business expenses. For example if I take a business-related trip where I do things that I enjoy, do I count my income after that expense? Or do I say I earned part of it and then spent it? If this isn't consistent year to year goals can easily be distorted. It's even worse if the income is counted before all expenses since it's easy to earn more by spending more.
@AnatoliN: You're right that there are life goals to go along with financial goals. To her credit, Krystal Yee included life goals in her post.
ReplyDelete@Simply Rich Life: It sounds like you have a good handle on your debts. While I think it makes sense to be debt averse, I think that even if you choose to take on debt for good reasons it makes sense to do it consciously and to track debt carefully. Debt-related goals can help with this.
I've got a post planned on our 2013 financial goals. #1 on the list is to make about $6,000 in lump sum payments on the mortgage this year. That should accelerate our mortgage payment to about 8.5 years left.
ReplyDeleteIf we can make that happen without taking on any new debt, and invest like we have been in our TFSAs and RRSPs, 2013 would be a good year.
@Mark: $6000 is quite a bit to pile on your mortgage, but certainly possible. I'd suggest adding an explicit goal about not adding any new debt. That would close the loop. If you end up having to use a LOC for some emergency, then you can just decide that you didn't meet that particular goal.
ReplyDeleteUnfortunately for me, I am one of those people foolish enough to borrow money for the sake of meeting my investment goals :D For example, one of my 2012 goals was to put $25,000 into new investments. I did meet my goal in the last month of the year, however in the same month my line of credit balance also jumped up by almost $20K because I had to borrow money to pay for my investments in December, lol. The problem is I'm kind of addicted to taking on debt when interest rates are low. My debt has been growing every single year since 2008. But my debt to income ratio is already over 600% now and if I don't stop this trend soon I could be in big doo doo, so I think you raise a pretty interesting point though :D Maybe for my 2013 goals, which I haven't decided on yet, instead of setting goals with total amounts, I will use net amounts which subtracts any debt involved.
ReplyDelete@Liquid: It sounds like you're more comfortable with debt than I am. When I bought my first house, my debt started at about 130% of family income, and I felt uneasy about it.
ReplyDeleteI am very proud of my family's no-debt-except-mortgage debt status. As a couple in our mid 30s with one child, we have tons of expenses constantly grabbing at us. But while I lament the size of our mortgage ($300k) and the small size of our retirement savings ($150K) I am relieved constantly by the fact that not only are we consumer debt free, but on track to be mortgage free in 10 years (or 15 total).
ReplyDelete@Anonymous: If you're on track to pay off $300,000 of mortgage in 10 years, that's more than $30,000 per year, which means you are definitely living within your means.
ReplyDeleteMy goal is to have $50,000 in savings by June 30th 2013 and no debt. I already have the no debt part done and plan to keep it that way. Saving like a maniac and hopefully my budget will prove to be correct and I will hit my target.
ReplyDelete@Tara: It's going to be very clear by June 30th whether you've met that goal, which is a good thing. Even if you don't make it you can take your savings minus debt now and what it turns into by June 30th to see how close you came.
ReplyDelete