In the previous post, we looked at setting financial goals everything you need to know to do so. This time, we'll look at what you need to do.
Everything You Need to DO
1. Link Goals to Timeline Events
For our goals to be MT, they need to be linked to events on our timeline that we created last week. Indeed, it’s impossible to do the maths to work out what our goals will cost in the future, unless we have a date in mind for the achievement of that goal.
So, add your goals to the timeline where you can see them. How old will you be at that point? How old will your children be? There’s something pretty sobering in this process, as you realise just how short life is. You’ll wish you got started earlier, believe me, but don’t be disheartened. You’re cracking on now, and that’s all good.
Remember, if those goals are for lump sum expenditures, then you’ll need to add them to your expenses in the year that they happen. You’ll have your ordinary living expenses, but if you want to buy a camper van in ten years’ time, you’ll have money going out from your reserves in that year. So, once you have worked out what the inflated cost of the camper van will be when you buy it, you’ll need to add that figure as an expense in the 2029/30 tax year – add this to your timeline.
2. Remember Your Existing Sources of Income When Setting Goals
Let’s say you have a goal to reach FI by 55 and you’re 35 now. That’s a 20-year timeline for your goal, and your desired lifestyle will cost you £30,000 a year in today’s terms. Applying a 3% inflation rate for 20 years gives us a nominal cost of that same lifestyle of £54,183 – let’s round that down to £54,000.
So, our lifestyle in 20 years’ time is going to cost us £54,000, but that’s only if we have no other sources of income, but maybe we do. Perhaps we have a rental property that pays you £12,000 a year now. If we’ve got a desired lifestyle of £30,000 (in today’s terms) and we’ve got £12,000 coming in, that’s a shortfall of £18,00. We can factor up that shortfall for 20 years as approximately £32,500.
In 20 years’ time, we don’t have to find £54,000, we need to find £32,500 to sustain our lifestyle. Maybe when we’re talking about FI and retirement we need to factor in the state pension.
When we factor that in, payable from whatever age you’re eligible, then our FI goal will be reduced further, because we’re not going to need to find that money; it’ll just come in. We could take that amount off our goal too. So now, we don’t have to find £32,500, we’ve only got to find whatever the difference is.
But let’s keep things simple and use that £32,500 as our goal. If we use the 4% rule, 25 times that £32,500 is £812,000 in capital. So now we have a figure we can use to work back from to work out a savings rate.
3. Apply Inflation Factors to Come up with a Future Cost
A reminder of inflation factors: in order to come up with an inflation factor so you can work out what a sum in today’s money will be in x number of years’ time, the sum is:
1 + the rate of inflation, to the power of the number of years
If inflation is 3%, then you start with 1+ that figure, which is 1.03 expressed correctly. Then you multiply this by itself as many times as you have years to your goal. You can use the Google Sheets spreadsheet to help you: enter the inflation rate and the term, plus the figure you want to inflate and you’ll get both the inflation factor and the nominal amount at the end of your term.
We can only think in today’s money. If we apply a pounds and pence figure to a goal, in today’s money, we’re going to need to work out what that will be at some time in the future. Then, when we’ve done that and we know what our future goal is, we have to work backwards to calculate our monthly savings to help us reach it.