Having an idea of your financial goals, splitting them into short vs long-term is the first and most important step to financial planning. There’s another article providing the overview of financial planning but here’s the article with more details on setting your financial goals.
Start with setting your Life-Goals
Taking a step back, it is key to realise that money is simply a (really important) means to get you to your other life goals. As such, it is key to take some time to think about your life goals (if you haven’t already), prior to setting your financial goals.
Everyone is unique and will have different life goals but to start the ball rolling, I’d list down some of the more common ones, especially those that largely depend on money to achieve them below. However, I can’t stress enough you should take some time to consider which are the ones relevant for you and what other goals not in the below list is important for you.
A better understanding of your own life goals can then guide your financial goal setting. Each financial goal should be specific, stating clearly the amount of money you need and when you need it. With the latter, the goals can then be viewed in terms of short-term (<5 yrs) and long-term (>5 yrs) which would subsequently guide your financial planning (e.g. saving cash for short-term goals, investing in various type of products for mid/long term goals. Once again, here are some sample goals to help you start the ball rolling!
Short-term Goals (<5 yrs)
Table showing life goal > Financial Goal > How much $$ > At which age
Long-term Goals (>5 yrs)
The above is a sample overview of setting your financial goals, starting from your life goals. With a good understanding of how much money you need and at which juncture of your life you need it by, it is then time to continue to subsequent steps of financial planning – see more in this article.
You’d soon realise that like many others things in Financial Planning, the definition above is made overly complicated.
In this blog post, after muddling in murky waters for the past 5 years (e.g. reading countless articles on what is the best bank account to start with, what is the best credit card I should use), I’d like to share with you my simplistic take on what Financial Planning is and the 3 key steps I wished I started with that would have helped me focus on the more important items, putting myself (and my family) in a better financial state.
So what is Financial Planning to me? It is evaluating what we need to change (e.g. increasing our income, reducing our expenditure, investing more) to help us achieve our Financial Goals in life.
This can sound very daunting to any young adult and you may begin to wander why there wasn’t a subject or module on this in secondary/tertiary education but fret not, here are the 3 steps (and a excel template) to begin Financial Planning using my 25 year self as an example.
Some of the above goals may not be important to you (e.g. you may not want to have kids, especially when you find out how costly they can be) while you may also have other goals (e.g. it was always your dream to get that BMW by 35, or to go for a year long backpacking trip at 30). Regardless on what your Financial Goals are, it is key to begin your financial planning by listing what your goals are, so as to know what you want to work towards.
After listing down your financial goals, the natural next step is to estimate (i) how much money that is and (ii) when you need that money.
For example, how much money do you need if you want to be financially independent? In my case, I have defined financially independent to be being able to generate enough income from my investments (at low risk tolerance) to fund a monthly expense of $4,000 per month. Hence, this would work out to be requiring $1.6m worth of investments (at 3% returns). See more details in the excel file template you can get at the end of this blog.
The above is just the tip of the iceberg for setting financial goals, read more here for a full article on how to set your financial goals for the short, mid and long term.
Step 2 – Project if you are on track to hit your Financial Goals
Based on the data you have today, project if you are going to reach the financial goals you want to achieve in Step 1. As with any projections, this is simply an estimate but is very useful to give you some idea if you are currently on track to reach your financial goals. Once again, you can reference the excel template provided at the end of the blog post for this.
There are 3 key components in this projection:
From the above 3 components, you would be able to project your cash flow and check if you would be able to reach your financial goals.
Step 3 – Make adjustments to increase chances of reaching your Financial Goals
Once you have completed Steps 1 and 2, you would be able to check if you are likely to achieve your goals. More importantly, you would be able to evaluate what are the key areas you should work on to increase the chances of you reaching your goals. With reference to the 3 key components in step 2, here are the ways to increase your chances:
Looking back when I got my first job, I dived straight into details such as what is the best bank account and credit cards to use, what insurance I should get, etc.
However, if I could turn back time, I would instead start with the above three steps to first make sure I am clear on what my Financial Goals are (i.e. my target board) and what I should focus on to increase my chances of achieving those goals (e.g. focus on starting investing earlier rather than trying to reducing my monthly expense by $50).
So, take some time to download the excel file (if you haven’t already), and follow the three steps above to identify what are the key areas of focus you should work on to help you achieve your financial dreams!