How to set achievable financial goals (and 4 ways to meet them)

In recent months, you will have read a lot of my thoughts on how to achieve financial freedom, and tips for how to help you live the life you want with the money you have. From the habits of the wealthy to more practical budgeting tips I’ve shared ways in which you can enhance your financial wellbeing.

But what is all this for? One of the most important ways to achieve financial security is to know what your goals and ambitions are. When you set goals, you’re motivated to take positive steps towards achieving them, you can measure your progress, and you can make changes as necessary.

5 steps to reach your financial goals

1. Set your goals

What, exactly, are your personal financial goals?

These will be different for everyone. On a short-term basis, they might be to save the deposit for a new home, buy a new car, or pay for next summer’s holiday (Covid-19 permitting, of course!)

In the longer term, your goals may be to enjoy a long and fulfilling retirement, help your children get a good start to their adult life, or to leave a legacy to loved ones or charity.

Whatever your goals are, the key is to make sure that you have some. And make them specific. ‘Financial security’ is an admirable ambition, but what does it mean? It’s hard to quantify, and therefore hard to measure and establish whether you’ve reached the goal.

Your financial goals may be to:

• Retire at age 60 with enough income to maintain your standard of living
• Pay for your child’s university education
• Own £500,000 worth of investments in 20 years’ time.

Once you have a list of your goals, it makes working towards them that much easier.

2. Work out what you’ll need to meet those goals

Once you know what your goals are, its time to cost them up.

Sometimes this will be easy. It might be quite straightforward to work out how much you’ll need to put your child through university. Or, if the second home you have your eye on costs £200,000, that’s a pretty specific goal.

A comfortable retirement, however, might be a little more difficult to cost up. You may need to do more work around what outgoings you’ll still have at that time. For example, your mortgage may be paid off and you don’t have to buy a season ticket anymore, but perhaps some of your outgoings will increase if you’re spending more time at home?

Speaking to a financial planner can be useful at this stage. For example, they can use cashflow modelling to forecast what your income and outgoings might be in retirement, and therefore how much ‘enough’ is likely to be.

3. Factor in inflation

If your goals are in the future, you’ll need to factor in rises in the cost of living. So, once you’ve established what your ‘pounds and pence’ goal is in 2021 money, you’ll need to consider the effects of inflation.

Using an online inflation calculator, and assuming a 2% annual inflation rate, if you want to save the equivalent of £100,000 by 2040, you will need to put aside £148,590.

The easiest way to deal with inflation is to set goals in today’s money, and then apply the inflation factor.

4. Consider your existing income sources

Let’s say that you are 40 years old now and you want to retire at 60. Your desired lifestyle will cost you £40,000 in today’s money, and you have 20 years to reach that goal.

If you apply a 2% inflation rate for 20 years, your lifestyle will cost around £59,000 by the year 2040.

While that might seem like a lot, you may well have income from other sources. For example, if you have a rental property that pays you £18,000 a year now (around £26,000 in 20 years’ time) then you only need to fund the shortfall of £33,000.

When you start to receive the State Pension, that will also make up a significant portion of your shortfall in later life.

Using the example above, let’s say the shortfall is £33,000. If you use the 4% rule (withdrawing 4% of the pot each year in order to try and ensure you don’t run out of money), 25 times that £33,000 is £825,000 in capital. This gives you a goal you can work towards.

5. Work out a savings rate to meet your goal

If you can express your financial goals in monetary terms, and you know when you want to meet that goal, you can work back to establish what you need to save to reach that point.

Using the example above, if you want to reach a goal of £825,000 in 20 years’ time, assuming a growth rate of 4% a year, you’d need to save £2,268 per month (source: Money Advice Service).

While this might seem like a scary figure, it’s important to factor in your secured income sources at different points. This might include the State Pension, final salary scheme benefits from work, investment income and so on.

It’s also worth considering that, if you’re investing in a pension, some of this money may well come from your employer, and some from tax relief. This will definitely make the saving amount more affordable!

Again, working with a financial planner here can give you clarity.

4 ways to reach your financial goals

So, we’ve looked at the steps you can take to formulate your goals and what you need to do to reach them. Here are four simple tips that can help you:

1. Spend less than you earn – it’s a simple but effective way of managing your finances. Spend less than you earn and save the difference – this budgeting blog has some excellent tips.
2. Insure yourself against bad surprises – your plans can be blown off course at any time. So, make sure you have a rainy-day fund and put the right insurance in place, so you always have an injection of capital (or income) if you need it.
3. Invest for your future – I recently wrote about why great investors have optimism in the future. When you invest in the stock market you are essentially investing in human progress and taking advantage of the opportunities offered by equities can help you to reach your financial goals. Of course, you must remember that the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
4. Leave a meaningful legacy/work on life’s purpose – once you are financially comfortable you can begin to look at how you use your accumulated wealth positively – either as a legacy for your loved ones or for society as a whole.

Get in touch

One of my key roles as a financial planner is to help you to set goals, work out how to achieve them, and make sure you stay on track. To find out more about how I can help you to meet your goals, please give me a call on 07769 156 250.

 

Foster Denovo Limited is authorised and regulated by the Financial Conduct Authority.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

The calculations used in this communication are based on several assumptions and are for illustration only and past performance is not a guide to future performance.