Many of us find it difficult enough making our ends meet from month-to-month without having to come up with financial goals, which require additional financial commitment. Unfortunately, as with most personal financial planning issues, financial goals are very necessary. Financial goals help you do all the important things like buy a car, buy a house, plan for retirement, and manage debt.
Think about what’s important to you
What do you want to achieve? Do you want a fancy car and a big house? Do you want a comfortable retirement? Do you want to send your kids to college? Do you want to clear your debt by the time you’re 40 years old? Do you want all of the above?
You then need to think about it realistically.
Can you buy the latest Mercedes Benz SLK and a five-bedroom, five-bathroom, five-garage three-acre house, and contribute enough money towards a pension fund that will keep you comfortable for about 30 years of retirement, as well as put your 2.5 kids through Harvard or Yale without ending up in so much debt that it’ll take you about 200 years to pay it all back?
If you’re just an average Joe (or Jane) then the chances of you meeting these goals are pretty slim.
Prioritise and compromise
Priorities vary according to lifestyle, values and family situation.
A married, but childless executive couple may prioritise the house, car and pension. A single father of three might prioritise the college fund, house and an emergency fund.
It’s very seldom that you won’t have to make some sort of compromise. Even our executive couple will have to sacrifice some bells and whistles to meet their goals.
For example, they may have to settle for a three-bedroom house and a Merc C-Class Coupe. They can still have all the latest mod cons and gadgets but may have to sacrifice the three-car garage to ensure that their retirement annuity is up to scratch.
Our hard-working dad might have to buy a used car from the stone ages to maintain the house payments to keep a roof over his kids’ heads. And the emergency fund might have to do with fewer payments to keep his kids in school.
Whatever the goals, you need to come up with plan to meet them.
This means that you need to estimate the end cost. How much money will dad need to put three kids through college? How much money will our couple need to buy a house and car?
You’ll also need a cut-off date; otherwise what is the point of setting goals? So, dad might give himself 15 years to fill up the college fund and, despite some ups and downs, three years to build up a comfortable emergency fund.
The couple might give themselves two years to come up with a 30% deposit for the house and one year for each of them to save enough money to pay off 50% of their new cars (plural).
Once you have your end goal and your end date you’ll be able to determine how much money you need to put aside every month. You might find that you need to tweak your goals slightly if they start looking unrealistic and you find the sacrifices too great.
Remember to be disciplined but flexible. You need to commit to your plan every single month, but you can’t let one setback deter you. Our dad might find that a burst geyser means he can’t put any money in his emergency fund – in fact, he’ll probably have to take some out. But he should dust himself off, adjust his goal date and carry on.
One member of the couple might be retrenched, so the goal posts will need to be adjusted to accommodate the period of unemployment and then the new salary.
Whether your goals are humble (paying off your credit card debt) or mighty (buying a mansion on the hill), you need a proper plan and discipline to see that you meet them.
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Written by Sandy Cosser on behalf of Direct Axis, a personal financial services provider that specialises in consolidation loans, quick loans and vehicle finance.