In the last post we started to look at what you need to do to set financial goals. This blog looks at the last two important factors to consider.
Work Back to Find out Your Monthly Savings to Meet Goals
If we can express all of our future goals as a lump sum need at a particular point, then we can work back form that to come up with a savings goal – what we need to put away now to get to that point. This is usually the point where we get freaked out at what looks like a massive number, and then decide to do something else.
This is particularly true if the numbers really are huge, but remember the following: Factor in your secured income sources at different points, which might include state pensions, final salary scheme benefits from work, rental income and so on.
Also, don’t forget the magic of free money, in the form of tax relief, and, if you’re employed employer pension contributions. You can get both your boss and HMRC paying towards your plan for you, which will definitely make the savings numbers more palatable.
If it works out that you need to save twice your monthly salary to achieve your minimum standard of living in the timescale you require, you have either a) got your maths wrong or b) you’re going to need to reassess your goals and bring the R of SMART back into play – Realistic.
Tinker with the Maths
Let’s say you’ve identified your goals, inflated them and worked back to come up with a monthly savings figure, and it’s doable. In fact, you find that there’s more money you can put aside.
You can then fiddle with the figures to bring your goals forward in time, or adjust the growth rate down so you don’t need to take as much risk to achieve the goals. And you can project your savings forward to see what your capital will be at certain points in time
We’re aiming for a cashflow forecast (money in/money out) for each year of your timeline, and you should be able to quantify what you need to do to make it work. You may have years where you have more going out than is coming in, and you’ll have to dip into your reserves. That’s fine as long as your capital value doesn’t go negative…