Tuesday, October 11, 2011

Evaluating Financial Goals

Mark at My Own Advisor wrote an interesting post about his financial goals that gives me a chance to show how I evaluate financials goals. Most people look at each goal on a pass/fail basis, but I look at dollar amounts.

Mark was good enough to give enough financial details to make my type of analysis possible. In a few cases where I’m not sure of the dollar amounts, I’ll just make up a figure. I apologize in advance if I get some of the numbers wildly wrong. Without further ado, here are Mark’s goals that we’re evaluating for the first 10 months of this year.

Goal # 1 – Increase mortgage payments by $200 per month

This amounts to $2000 over 10 months. He achieved this one:

Goal: +$2000
Achieved: +$2000

Goal # 2 – Contribute $5,000 each to TFSAs

Mark achieved this one for one TFSA, but not the other.

Goal: +$10,000
Achieved: +$5000

Goal # 3 – Optimize our RRSPs

Only Mark knows how much he is saving per year on MERs here. I’ll call this one $1000.

Goal: +$1000
Achieved: +$1000

Goal # 4 – Continue my full Dividend Reinvestment Plan (DRIP) with Bank of Nova Scotia

Mark achieved this one for $100 per month.

Goal: +$1000
Achieved: +$1000

Goal # 5 – Start my full Dividend Reinvestment Plan (DRIP) with Fortis

This one is not as complete as the BNS DRIP. I’ll guess that he achieved 50%.

Goal: +$1000
Achieved: +$500

Goal # 6 – Build up our emergency fund to $10,000

This one didn’t go very well for Mark due to some big expenses, including a new roof. He had to dip into a line of credit.

Goal: +$10,000
Achieved: negative by the amount of Mark’s LOC balance

The overall scorecard comes to

Goal: +$25,000
Achieved: +$9500 minus LOC balance

So we see that how well Mark has done so far this year depends greatly on the size of his line of credit. If it is big enough, then he has actually lost some ground despite achieving most of his financial goals. I suspect that Mark is actually on a good path, but many people have a line-of-credit problem that masks poor personal financial results. It doesn’t matter if you’re saving money in all kinds of different accounts if your line of credit is growing faster than your savings.

In summary, my preference is to rate personal financial results with dollar amounts rather than taking a pass or fail on each goal. This can be depressing if it turns out that your line of credit makes your overall results negative, but it is better to know if you’re losing ground rather than being misled by achieving several small goals.


  1. Like in business, it's important to use numbers to measure your success.

    Unfortunately (also like in business) Mark was hit with a large one-time expense, in this case it was a new roof, that drastically altered his finances this year.

    While it's tough to label these goals a success when looking at a one-year snapshot, it's also pretty unfair to rate this as a failure when it's clearly not a spending problem, but a one-time financial hit that needed to be dealt with.

    I understand your point and it's probably not to pick on Mark, but I just wanted to point out that this type of expense should be classified as a capital expense, and not as an indication of a cash flow problem.

  2. @Echo: You're right that I don't want to pick on Mark. It's just rare to have someone supply enough information to do this type of analysis.

    I have no objection to treating a roof and certain other expenses as capital expenses, but you have to look at all of them. For example, if we choose to charge only 5% of the roof's cost this year, we have to change 5% again each year for 20 years. And we should do the same for all other capital expenses: carpets, furnace, hot water heater, etc. A percentage of each of these things have to be charged each year. An equivalent way to look at this is whether this year really was atypical for Mark. If he is confident that his capital expenses will be lower in a typical future year, then he can reasonably conclude that his financial performance this year is better than it looks. But this has to be done with numbers: add up all the possible capital expenses and figure out what the average capital expense will be each year.

  3. Interesting analysis.

    I think you misread his TFSA goal - he said he maxed out his own TFSA ($5,000) and did not max out his wife's. So his TFSA score should be $5,000/$10,000.

  4. @Mike: I think you're right. I misunderstood the "50% complete" on the first reading.

  5. This is better than getting any portfolio makeover Michael!

    Thanks for taking a detailed read and look into our goals.

    Overall, I think we're doing well but this LOC has been a huge PITA (pain in the...) this year.

    I'm hoping this will turn out to be an atypical year for housing, capital expenditures. It's not everyday you put a roof on your house, let alone one that is the price of a small car. That said, it was our decision and our decision alone.

    To this end, I'm confident we're doing the right things. If the LOC is paid off in another year or so as planned, that's over $10 K to debt repaid rather quickly and something we'll feel very proud of.

    I did in fact max out my TFSA in 2011 ($5K), unable to do so for my wife. Next year, after the LOC is done, we'll play catch up.

    Thanks for the free analysis.

  6. @Mark: Gald you liked it. It's hard to predict how someone will react to unsolicited commentary. Hopefully, this will help others measure whether they are getting ahead or falling behind.

  7. All perspectives are welcome Michael.

    It's just a blog after all (yours and mine) and folks are certainly entitled to their opinions and perspectives.

  8. This was a good read and I'm definitely glad to be one of the many people following your blog. It has helped me understand how to evaluate my own financial goals. And having done so (a lot rougher than what Mark or your example did), I think I can say that I'm still gaining per year. Especially since I my biggest debt is post-secondary education and I'm well on my way to paying that off within a few months.

  9. Enjoyed the analysis. One thing I might suggest is that your goals have to be prioritized, as some goals have more financial benefit than others. For example, if your mortgage rate is low (let's say 4%), and your rate of return on a TFSA is 6%, you should be maximizing your contributions to your TFSA before considering increasing mortgage payments. I even had a lengthy discussion with a friend about whether it was more financially beneficially to maximize TFSAs before RRSPs or vice versa, but that would be an interesting new topic for your blog.

  10. @Jim: I agree that some goals should have higher priority than others. For example, paying off a credit card is more important than TFSA savings. For your specific example, though, where can one get a guaranteed 6% return in a TFSA? If there were a way to do this I'd head out and borrow a few million at less than 6% interest.