The Process of Defining Our Long-Term Savings Goal

Most of us agree that having goals is critical to our performance in sports and at the workplace, but is having clearly defined goals when we invest as obvious to us?

I'll readily admit that I had no clearly articulated goals connected to my stock investing until just recently. Sure, there has been something that could resemble a long-term vision in the back of my mind of one day being financially independent, but not much more. I had not defined any long-term goals or any milestones for that matter that had to be met in past. Milestones are important because they keep us on course and motivated. Until recently I knew roughly in which direction I should go, but not which road I would take and how long I would need to travel.

What makes for a good goal? From my own work related experience, I know that good goals should follow the SMART Method and be:

S = Specific
M = Measurable
A = Accepted
R = Realistic
T = Timely

The first time I tried applying the method to my investment process was in conjunction to when I started to blogging in the beginning of 2014. It's ironic how one can be preaching about the importance of SMART goals at the workplace, but at the same time not apply this knowledge to something as important as one´s savings. It takes a while for the sinner to wake up, but better late than never ...

I will now use the SMART Method to incrementally describe me and my family's goal-setting process.

S = Specific
A goal should be specific for it to have any effect, the more specific a goal is the easier it is to follow up. If the definition is too vague, it becomes more of a vision than a goal, to become financial independence is more of a vision than a goal. A more specific goal would instead be that we want to have a passive income equivalent to a certain amount to cover our cost of living. With this in mind here is how the first draft of our long-term savings goal was formulated:

"Our portfolio generates a passive income in xx years time equivalent to about xxxxx dollars per year which covers our our annual living costs."

For each year until the long-term goal is met, we will have milestones that are formulated as follows:

Our portfolio generates an annual passive income equivalent x $ during 20XX .

M = Measurable
To follow up if we reach our milestones and ultimately the final goal, we ha to define how large we needed the passive income to be. In order to define how large the passive income needed be, we first had to figure out how big our cost of living was per year.
Today, my family lives a comfortable life with about 4 100 dollars a month which is equal to about 49 000 annually. We also took into account inflation and approximated it to be 2 % per year.  When inflation is taken into account, the amount that we need to achieve approximately 73 000 dollars in passive income annually.

Furthermore my family will on average put aside about 2 000 dollars monthly. When we started our mission in the begging of the year we had a stock portfolio with a market value of about 37 000 dollars and with a " yield of cost" of 4.58% .
Annual fees (brokerage and taxes) related to savings are estimated at 2.5% per year.
Dividends and new savings are invested in stocks with a dividend yield and lowest annual dividend growth, according to the table below.

Based on the preconditions above, I get the following chart:

After the defining the preconditions we had enough information to formulate long-term goal :

Our portfolio generates a passive income in 20 years time equivalent to about 73 000 dollars per year which covers our our annual living costs.

The milestones for each year until the long-term goal is met became the following:
-Our portfolio generates an annual passive income equivalent to 2 000 in 2014.
-Our portfolio generates an annual passive income corresponding to 3 100 in 2015.
-Our portfolio generates an annual passive income corresponding to 4 400 in 2016.
And so on.. (See chart above )

A = Accepted
Since I have a family, there is no way I can achieve this long-term goal on my own. The goal and what it will cost us to get there, must be accepted by my family. To achieve the long-term goal of becoming financially independent within 20 years requires the family to set aside about 2 000 a month for about 20 years. Setting aside the that sum monthly doesn't have a negative impact on our standard of living or ability to travel for the foreseeable future.

R = Realistic
Based on our financial situation, and the dividend growth that is possible through stable and well-managed companies, I find the goal realistic.

T = Timely
Each individual milestone will be met on an annual basis and the long-term goal is to be met in 20 years time, in other words, 2034.

That was a brief run through of our goal setting process. The long-term investment goal can be viewed at any time through the main menu of the blog.