What is Your Financial Goal?

Have you ever think what do you want to have or do in the future? I bet everyone surely does think about it. It can be: having a house, a luxurious car, Euro trip or even as simple as having a big wedding. But have you ever measured your goals in terms of money? Do you know how much money you should save today in order to get enough money to fulfill your future goals?

Financial Goal: A Dream House Facing Beautiful Lake, perhaps? :-p

I have written the first step in financial plan, managing cash flow, in my earlier post: http://indispensablelady.blogspot.com/2012/04/big-spender-vs-big-saver.html. Now let's discuss the next step to build your financial plan: determining financial goal. Without having a clear stated goal, it would be harder for us to save consistently, as we sometimes cheat ourselves, by using the saving for unnecessary spending. Whereas, if we have the goal, we know the risk of not saving: not achieving our goal timely.

Hence, there are few questions to consider when determining financial goal:

1. What are the goals?

2. How much money do you need to achieve the goals?

3. When do you want to achieve the goals?

The basic goals in financial planning are: emergency fund, pension fund, kids education fund and other general goals, such as: house fund, car fund, wedding fund, holiday fund, etc. As we could see, the goals stated above can be classified as short term goal and long term goal. Usually we classified goals that expected to achieve in less than 5 years as short term goals, while over 5 years is long term goals. However, each goal must have different time limit, which you should be determined yourself.

Then how to determine the amount of money of each goals? For emergency fund, the basic assumption is as shown below:

It means, if you are single, then your emergency fund should be at least 4 times of your monthly expenses, if you are married then the amount is bigger, and so on. The amount of monthly expenses can be obtained from your budgeted cash flow. Emergency fund is considered as short term goal, then you should already spare it from your earning since now.

For other type of goals, you need to know how much the current value of each goal and understand the concept of time value of money, where the value of money at the moment is different than the value at the future. Using future value formula, we could calculate how much money you needed at the year you want the goals to be achieved, using the current value. For example: if you want to buy a house which current price is 2,000,000 kroner within 5 years, using assumption of inflation rate of 10%, then the value of the house in the next 5 years is 3,221,020 kroner. Then it will be the amount of your financial goal.

The calculation for pension fund is a little bit more complex. Firstly you have to decide, how much is the lifestyle that you want to protect if assumed you are entering pension period right now. Usually it expressed in percentage of your current monthly expenses, from 80-120% of current monthly expenses. The amount calculated is your monthly pension expenses. Then you determine when you want to start the pension and how many years left from your current age. Using those two aspects, we could calculate the future value of your monthly pension fund. After that you should decide how long is your life expectancy, you could use the average life from elderly in your family. Lastly, you calculate total pension fund you needed to have in order to have a peaceful pension time.

The complicated calculation sometimes overwhelmed people. That's why you needed a financial planner to help you with the calculation :-D Maybe now you are wondering, why do you have to calculate the financial goal? Other than cheating minded as I mentioned earlier, by having the exact number of the financial goals, we could calculate how much money we should save now, either it one time investment or even regular investment. As you must know, the earlier you start to save, the lesser money you should save, which will help you a lot in managing your cash flow, without having to sacrifice a lot in your current lifestyle. Well, that's one of the magical thing of time value of money :-)

Hope this simple articles help you understanding the importance of financial plan better and even better if you would be able to calculate your own financial goals. Even if you couldn't, you could always contact me to create a financial plan for you, of course with a reasonable cost. Let's start planning today for better future :)

Cheers,

Indispensable Lady