Here’s How You Can Achieve (Most Of) Your Financial Goals
Previously, on Money Tok, Amit recounted how his wife and he had… umm… let’s call it a ‘difference of opinion’ about how much they needed to save for financial freedom. Which got him thinking about Needs and Wants and how best to calculate how much you have to save to achieve your life goals.
But it’s one thing to do some spreadsheet math to figure out how much you need to save. It’s quite another to reliably save that in time for when you actually need it!
As I argued earlier, goal-based investing seems a superior alternative to open-ended wealth maximisation. And this is where I get to bring the point home!
The discussion below is going to be a bit complicated and difficult to do without the help of a spreadsheet. But don’t worry, I’ve linked a handy goals calculator at the end so you can save hours implementing what we are discussing here. So, for now just read on.
Estimate your current savings
Estimate the value of your private jet, your fine art collection, that mansion in the Hamptons, your stock portfolio…
… or maybe take a hard look at your current and savings accounts, the equity on your home, your kid’s college fund, the dollar bills in the cookie jar and, what the heck, the fifty bucks your friend owes you from last weekend and add it all up to figure out how much you currently have.
This, my dear future millionaire, is what the VC industry call your seed fund.
1. Set up your funding plans
We are going to approach each goal independently, as if they exist in isolation. This has several benefits:
- A failure in one area does not jeopardise your entire financial plan
- You can adopt a nuanced approach, targeting appropriate investments for each goal, rather than taking a one-size-fits-all bet on your future
- You can shoot for the moon on a few desires, while attempting to guarantee results on your most important Needs
So roll up your sleeves and gather the family round, folks. Because this is where you get to be your own hedge fund manager. Your own Ray Dalio, or Warren Buffet or Peter Lynch.
Financial planning is often painful, and frustrating and stressful. But this is one time you get to have some fun!
Seed each goal with a share of your current savings
Now comes the fun part. Allocate a share of your billions — or maybe your hundreds (tens?) — to each of your goals.
For this first pass, allocate more to shorter term goals and less to longer term ones. I’ll explain why in a moment.
Go on, do it. I’ll wait.
Choose an appropriate investment for each goal
You may know that different investments have different risk-reward profiles. In general, the ‘safer’, or lower-risk, the investment, the lower the volatility and hence the lower the expected returns. On the other hand, higher-risk investments tend to be more volatile but also present the opportunity of a higher payday.
As an example, your savings account is relatively low-risk because the chances of your bank going bust and taking your money with it are relatively low (though, to be honest, the financial crisis did call that certainty into question). However, as a result, you earn a very low rate of interest on that money, perhaps not even enough to beat inflation.
On the other hand, the stock market presents a wild ride, with prices swinging several percent points a day and creating the risk of potential losses but also the possibility of hefty gains in a very short time. That’s why, over the long run, unless you’ve really invested at a bad time, stocks tend to deliver higher returns than savings accounts, as a compensation for the higher risk you are taking there.
In order to maximise your chances of achieving your goals, you need to pick higher-risk (or more accurately, higher-volatility) investments for longer term goals and safer ones for short term ones. Similar to seed funding, complete picking an investment each for every goal in your financial plan.
Allocate a share of your projected future savings to each goal
Now, it is highly unlikely that you’ll achieve your goals just putting your current savings into these chosen investments. But if you can, more power to you.
Luckily, you continue to earn and save every month. So set aside a share of that projected saving towards each of your goals as well. In this case, again, I’d recommend putting larger shares towards your nearer-term goals, and smaller amounts towards those further out.
Adjust your seed fund and savings allocations between your goals till the math shows you can achieve the goal in the requisite time
Once you have completed your first pass, you will likely realise that the numbers don’t work out. You will need to adjust the numbers to make everything match up so that you are able to get to 100% goal attainment on each of your Needs and Wants.
And when you have that…
… mission accomplished
Or maybe not.
Chances are, given the constraints of your seed fund, your savings ability and your goal timeframes, you aren’t even close to making the math work. Most likely your goal sheet shows one or two goals being met with the others being underfunded. Or maybe everything is short of funding.
And thats the unfortunate reality. Most of us simply don’t have or earn enough to be able to make all our dreams come true without some sort of drastic changes in our dreams, our earnings or our lifestyle — and often not even then.
But all is not lost.
2. At this stage you will likely need to rethink your goals
So now we need to make some hard calls to try and come closer to meeting our goals.
Extend timelines where possible
Many goals have flexible timelines. Perhaps you could push out full home ownership by a few more years. Or maybe you hav to work a few years longer before you can retire.
Downsize your goals
It’s normal to want the most that’s available and it’s quite likely you’ve set up the Cadillac of goals. Perhaps it’s time to consider Toyota instead?
Maybe your child can do without Harvard and instead go to a great second-tier school. Or perhaps she could get a scholarship to make up the difference? Maybe a mansion is not in your future, but a three-bed apartment may be good enough — or perhaps you have to live further out in the suburbs and not in the thick of the downtown action?
Be realistic. Pare down your goals. Prioritise what you most want in life and you’ll find you’re shaving off tens and hundreds of thousands in costs and coming that much closer to making them achievable.
Eliminate your more esoteric goals
Dreams are fun, but unfortunately reality needs to take priority. After you’ve cut your Need goals down to a more realistic size, if you are still mathematically short of meeting your goals, some of your Wants will have to give way to more important goals.
3. Reconsider your earnings or savings
Once you’ve cut your goals down to the bare minimum, if you find you’re still short of funding them, it is clear that you are simply not saving enough. Can you put aside a bit more every month in order to plug the gap?
If not, I’m afraid you really aren’t earning enough to secure even a bare-minimum retirement plan. But at least you know now, when you can still make choices, rather than years later when you’re out of options.
It’s time to urgently look for a better-paying job. Don’t wait till tomorrow or next week. Start your job hunt now and set a target of finding something better paying in the next 3–6 months.
4. Be more aggressive with your investments — not recommended ⚠️
A last resort is to go more aggressive with your longer-term goal investment plans. Where you might have been planning to invest in perhaps a medium-risk balanced fund that mixes stocks and bonds, you might choose to invest in higher-risk funds that are 100% focused on stocks to create the potential for higher returns.
This strategy might juice your returns enough to bridge any remaining gap to your goals but I don’t recommend it. The entire approach described here is designed to take the minimum amount of risk needed to achieve our goals. Taking on unacceptably high risk in the hope of making an outsize return is closer to gambling than to a proper financial strategy. You are better off reliably achieving a modest goal than swinging and missing. Not only might you not achieve your stretch target, you might actually end up worse off because of the higher volatility of the investments you made.
Further, most of us aren’t dispassionate enough to stomach major losses for extended periods of time. It’s pretty likely that you’ll end up pulling out of a high-volatility investment prematurely and losing money rather than staying the course and potentially having everything work out in the end.
If calculating all this is too much…
I understand. It took me quite a while to build a goal planner that could help me with my own goals as I estimated, adjusted and re-estimated till I got to numbers I felt were achievable.
You can get a copy of my planner here. All I request in return is your email address.
Don’t worry, I don’t spam — with a full time job I barely have time to write,
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Note: I am not a licensed financial advisor. Please use any advice, tips, tools and other material as guidelines only and seek help from a certified financial planner before taking any action
