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.