The 3 Goal Setting Principles to Achieve Financial Freedom

I talk about a chronic issue that plagues investors all the time.

And that’s setting the wrong goals.

What the typical Australian investors believe to be the right goals, I believe may not be serving their best interest. I’m talking about chasing goals around net worth rather than financial freedom. And it’s not their fault, because that’s what the ‘experts’ in the industry supposedly teach them.

So this week is all about understanding three principles that I teach to my clients:

  • What’s their baseline goals vs aspirational goals? What are the definitions and how do you establish these?
  • The difference between capital and cash flow goals, and why investors get this wrong all the time!
  • Tracking the gap – whatever doesn’t get measured, doesn’t get managed.

By understanding these three principles, I guarantee that some investors will reassess whether their goals are ideal.

The Problem

People tend to set goals for themselves when they’re younger and when life, less complex and their aspirations are less clear.

Unfortunately, most investors end up taking these aspirations with them even as life unfolds and their focus, lens and desires shift.

Clients choose to work with me because they like the ability for me to establish what they want and how to achieve it.

I only work with business owners who are doing well with their business and have a strong asset base behind them.

When we looked at their level of spending, I often found that even though they’re making a great income, they’re often living like university students – they’re relatively frugal, and they don’t like wasting money.

On top of this, they can create financial freedom much sooner, but they end up chasing the wrong goal.

These are more aspirational goals rather than a necessity to live.

Principle #1: Understanding the Difference Between Baseline vs Aspirational Goals

It’s important to be reminded that financial freedom is the ability to choose how you spend your time, where you spend your time and how you influence others.

Most business owners I work with can create financial freedom much sooner, but they end up chasing the wrong goals.

What frequently happens is that people often end up chasing goals based on net worth such as having a specific asset base, like “10 properties in 10 years” or they’d say to me that “when I have $10 million in net assets, I’ll know I made it”.

And for these types of investors, I ask them, “if you achieved these goals tomorrow, what would that mean?”.

Given the current property investing climate, Australian properties are producing a meagre 1 to 2.5% net return.

So is this an asset base that’s going to sustain you for the future?

Instead, I focus on helping investors tweak their goals based on debunking some of the assumptions they have around wealth creation.

When we go through the process of auditing how much investors believe they need to live, the number is inevitably significantly lower than the number they tell me.

And when I point this out to them and ask them why they don’t spend more, the response is often that they don’t need more. They’re happy to live off the income they’ve created.

That means the goals they were originally chasing (with the belief that it’s what they needed to survive) is completely different. And therefore, it’s more aspirational than baseline.

While baseline goals are all about understanding what you need to live off to survive, aspirational goals are much more intrinsic and by definition, aspirational in nature.

Now ask yourself, is your goal aspirational or baseline?

Principle #2: Capital Goals vs Cash Flow Goals

There’s nothing inherently wrong in chasing a certain net worth in your portfolio or ascertaining a particular number of properties. But if your goal is to achieve real wealth and financial freedom in life, it can be not very meaningful.

Over a decade ago, when the Australian property market was just entering a period of an unprecedented boom, you could see people achieving investing feats like “10 properties in 10 years”.

Now? It’s progressively getting harder and in my view, virtually impossible.

Banks are getting harder to deal with to get access to credit. Property prices are continuing to grow at unaffordable rates. Even people on relatively high incomes are having trouble achieving these types of goals.

So what do you do? You need to start thinking outside of the box.

I’m not discounting the fact that you need to have a solid net worth or capital base, but that amount is significantly lower than what investors think they need.

In my world, cash is king.

It doesn’t matter how many properties you have (even if they’re paid off in full). If these properties don’t deliver the goods in terms of cash flow, then what good are they?

You then leave yourself at the mercy of most property investors – relying on capital gains to achieve some level of return on investment.

Again, are your capital goals aspirational in nature? And should you be focusing on cash goals instead, which is what will ultimately deliver you financial freedom sooner?

Principle #3: Track the Gap

As Peter Drucker once said, “what gets measured, gets managed”.

If you don’t know where the finishing line is or whether you’re on track, how can you take action accordingly?

And this is why having goals is only one piece of the three principles.

You need to consistently track the gap between where you are and where you need to go every 6 to 12 months.

The other issue I commonly face is when I work with investors and ask them what they’re earning from their investments, they immediately point out the gross number.

In these cases, I’m quick to point out that gross numbers only show part of the picture. Just like how businesses have revenue and expenses, you need to understand the profit to see the real value of a business.

The same principles apply for property investing, and the only number I care about is the net number.

And I’m tired of the real estate industry and the so-called “experts” focusing on this gross number.

Think of your investments like a business.

What’s your gross income and running expenses, and then what’s the net income from this. This is the only true indicator of whether your investment is a good or a bad one.

Key Takeaways

Let’s be clear about one thing – it’s that you need to understand what your goals are.

There’s no right or wrong to baseline vs aspirational, capital vs cash flow.

However, one of these goals is going to get you to financial freedom, and the other is a game.

Knowing the difference between the two so that you can take appropriate action is key to ensuring you aren’t being left disappointed or in financial distress when it’s too late.

Clients come to me for clarity around where they need to go and how best to get there.

Beyond this, I help them gain access to a range of vetted, alternative investment opportunities that are not available to the public to accelerate their path to financial freedom.

If you’re a business owner and feel like you may have strayed the wrong direction in your investing journey, then get in touch with me to find out how I can help you.

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