How To Set Financial Goals For Your Future

Planning

How To Set Financial Goals For Your Future

Here we explain some steps that you can take to help get your personal finances in order so that you can make sure you are on track to achieving your long-term financial goals.

Published on 4 December 2017

While most people know the precise amount they earn every month, many are unaware of how much they spend. Even fewer monitor what they spend their money on. If you want to get your personal finances in order, it is absolutely essential to track your income and expenditure.

But the very thought of creating a budget can be annoying or even overwhelming. Consequently, the mistake that a large number of people make is to not pay any attention at all to their day-to-day expenses and to the amount that they save. At the other extreme, some individuals track every little amount that they spend – this is usually a waste of time.

The key to bringing about an improvement in your personal finances is to focus on the larger issues. Are you aware of the major financial commitments that you will have to meet in the next five or then years? Will you have sufficient financial resources to meet these commitments at that time?

Here are some steps that you can take to help get your personal finances in order. Remember to concentrate on the big picture and on the issues that you can control. Above all, be consistent. Don’t fall into the trap of micromanaging your expenses initially and then giving up altogether.

1. Pay off your debt

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It is highly likely that any amount that you borrow will carry a far greater interest rate than what you can earn on your investments. That’s why the first step that you should take is to pay off your debt.

Credit card debt can be prohibitively expensive. Additionally, the facility of paying only 5% or less on your card balance every month can lull you into a false sense of complacency. Before you realise it, you could have accumulated a large amount of debt.

If your card carries a balance, pay it off as soon as you can. Many people are unaware that if you use a card that you already owe money on from the previous month, you don’t get any credit at all. You are ineligible for the normal 30 to 45 days of free credit. The card issuer will charge you interest from the day that you make your purchase.

Review all the debt that you carry and make a plan to repay all the loans that you can.

2. Set up an emergency fund

Everybody needs a financial buffer to take care of unexpected requirements for cash. You could face a sudden medical emergency. If you lose your job, your main source of income will dry up.

How will you tackle these situations? If you don’t have an emergency fund to fall back on, you would may have to resort to high-cost credit card debt or to a personal loan.

A better approach is to set some funds aside for these types of situations. What is the amount that your emergency fund needs to have? While the answer to this question depends on your individual circumstances, setting aside three to six months of living expenses is considered to be prudent.

3. Create a budget

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List down your income and expenditure on a sheet of paper or on an Excel sheet. Putting the figures in writing or on your computer is an essential first step. It will allow you to get your thoughts in order and provide you with a document that you can revisit frequently to see how you are doing.

An essential feature of every budget is the sum that you plan to invest every month. Remember to set aside this money at the beginning of the month. If you leave this step for the end of the month, it is likely that you will fall short of your target.

Consider using the 50/30/20 rule. This system requires you to divide your monthly budget into three parts with 20% for savings and investment, 50% for essential expenses, and 30% for discretionary spending.

4. Plan for major expenses

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Do you need to set money aside for your children’s college education? Or are you planning to save for the down payment on a house? You need to have a plan that will provide you with the cash that you will need five, ten, or 15 years down the road.

Investing for your long-term needs requires specialised knowledge and skills, and taking the wrong approach can lead to earning a lower return on your investments – this is why many people opt to enlist a professional wealth manager.

It is advisable to get exposure to stocks and monitor your portfolio carefully. Stock investments have the potential to provide the highest returns, but they can be risky as well.

5. Invest for your retirement

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Figuring out how much money you will need for your retirement can be complicated. These are some of the points that you need to consider:

  • Your monthly expenditure when you stop working.
  • The sum that you will need for your medical expenses.
  • Changes to your lifestyle in your retirement years and the manner in which this will impact your spending.

Additionally, you will have to calculate how much you will earn from your investments. Don’t forget to factor in the effect that inflation will have.

After you compile all this information, you can draw up a financial plan for your retirement – and it would probably be a good idea to engage the services of a professional wealth manager to help you with this. Bear in mind that it is practically impossible get this estimate exactly correct. Instead, it is important to make an initial estimate and understand your current financial position so that you can initiate the steps to achieve your savings goal.

6. Review your progress

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Financial planning is not a one-time exercise. Over the years, it is inevitable that your situation will change. Your income may go up and give you the opportunity to increase the amount that you are saving every month. If you buy a house, a large part of your salary may go towards your mortgage payment.

It is also likely that your spending pattern may change. School fees for your children, for example, may eat up an increasingly bigger portion of your monthly budget.

It is essential to review your financial position on a regular basis. A complete evaluation should be done every year. You may also want to carry out a less extensive exercise every six months. This will give you the opportunity to take corrective action where it is necessary.

The bottom line

It is crucial to devote a certain amount of your time to formulate your financial goals and to monitor your progress towards achieving them. New investment opportunities may arise and tax laws may change. Making a course-correction could result in a significant improvement in your financial prospects.

With so much at stake, it would probably be wise to speak to a wealth services professional. The advice and guidance that you receive will be invaluable in helping you to achieve your financial goals.

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