A few years back, my wife and I sat down for one of our impromptu money talks. You know, the kind where she tells me that I need to stay at work so we can pay off our mortgage and I beg to be allowed to stop so I can have fun playing music and goofing off.
“Face it Amit, your music is not going to help us lead the lifestyle that we want!”
Now, I’m all for facing the music, but I ventured that we might actually be well on our way to achieving the life of our dreams without needing to grind away till 60. Right?
She gave me the look of debt. You know, the kind you give someone when they make it seem like that massive mortgage we have means nothing. The look — of debt.
“Are you crazy?” she said. “We just have X saved away. And most of it is in this apartment.”
Well, she didn’t say X. She gave me a number. But I don’t want to tell you. We aren’t that intimate yet.
I looked around, half expecting to see piles of cash peeping out from under the sofa.
“Umm, no, it’s in the bank,” I ventured.
“No you doofus. I mean it’s all stuck as down payment on this place. And anyway we only have X. We need Y.”
Y.
A number beyond my wildest dreams. Needing working years that were well and truly in my worst nightmares.
I tried and failed to do the math.
Stack overflow. Too many zeroes.
“Y? Why?”
And then she gave me an explanation. A pretty good explanation actually, but her ideas were quite different from where I thought we needed to be before we could stop working for money.
That’s when I realised — we all have such different ideas of how much we need. How much we think is right for our future lifestyle.
The real question is — how much is enough? But to figure that out, you need to plan out your financial journey.
Plan your financial journey
There are two ways to approach financial planning. Below I share with you both approaches, but I definitely prefer the second one over the first and that’s what the rest of this article is about.
The ‘Normal’ Approach: Maximise your wealth
One approach is to maximise your future wealth to the extent feasible with your risk-taking desire and ability. This the way most financial planners and banks approach your finances. They ask you a bunch of questions to determine your risk-taking ability and then recommend to you a mix of investments oriented towards that level of risk (and where they can maximise their commissions 😠 but that’s an article in itself!)
Once you are invested, they check in with you perhaps once a year to rebalance your investments to fit your updated risk profile.
I’ve done this a couple of times, both online and with an actual financial planner, but I’ve grown to really dislike this approach. It’s too open-ended and does not give me any sense of whether I’m going to have the right amount of money and at the right time to meet my needs.
An Alternative Approach: Set financial goals
Another way is to establish clear, time-bound and realistic goals and plan your finances in such a way as to achieve them over the desired timeframe. This is where you list out your key Needs and Wants and set up a plan to reliably achieve at least the most important ones at the right time.
My wife and I adopt this approach ourselves and I am a strong proponent as it creates a lot more transparency about how much you need, when you need it and whether you are actually on track to get there.
We’re going to explore this approach in the rest of this article.
1. Pick the right goals
It’s all too easy to bang out a laundry list of financial goals — and hey, I understand we all have hopes and dreams — and responsibilities to others — but, like they tell you on flights, it’s critical to secure our own oxygen masks before we try to help others.
First, cover these basic Needs — things that will secure your future
There are five Needs I advocate that we should all work towards before anything else, and in the following order of priority.
- An emergency fund for protection against layoffs or other unforeseen events
- Retirement or financial freedom for when you can’t or don’t want to work any more for a living
- Paying off debts
- Owning a fully-paid home
- Saving for your kids’ education
Only then consider your Wants — things that you owe others or make life more fun
Examples of Wants could be things like:
- Paying for your kids’ wedding — this is likely more a Need in a place like India where lavish, parent-funded weddings are a social expectation
- Annual vacations or that cruise around the world
- A lump sum to leave your family — no, this is not strictly-speaking a Need
- Fun stuff like owning a vacation home, a boat, a country-club membership or whatever
Just make sure the list isn’t insanely long or you’ll never be able to stop working.
2. Calculate how much to save for each goal
Now that the fun part of listing your goals is done, you have to do the accounting bit — figuring out how much you need to save for each, and when.
Determine how long you have to achieve each goal
Most likely, your goals are some time in the future, and you need the money at various future dates. So determine the timeframe by when you need to achieve each goal.
As an example, if your child is 10 and you are setting aside college money, you would expect to to need it 8 years from now. But you may want your emergency fund to be in place as soon as possible, maybe in the next 12 months. And perhaps you’d like to have paid off your debts within 5 years. Just make sure you work out a realistic timing for each goal.
Pro tip: Where the timing is not externally-mandated (eg college) and you have flexibility to choose, try to push it out as far as possible so you have more time to try and achieve it. Thanks to the magic of compound interest, in money matters — unlike in other parts of life — time is your friend.
Figure out the cost of each goal
Once you have figured out when you want each goal to come due, you need to estimate the cost. For this, do some web research to determine:
a) the current cost and
b) the expected price increases over the period of time till you need the money
Then use this calculator to estimate how much you need to achieve that goal at your specified time in the future.
For example, if 4 years at Harvard cost (gasp!) $300k today, and college fees in the US have been rising by 3% on average each year, you’d need to set aside $380k 8 years from now. You can see the calculation here.
Retirement/ financial freedom goals will take more work
How much do you need to fund your retirement? Well, that’s the several million-dollar question, isn’t it? The answer is entirely dependent on how you see your Financially-Free lifestyle and when you want it to begin.
There’s a lot to discuss here — and it’s pretty exciting — but I also don’t want to weigh down this article with so much detail so will write it up separately.
But if you’re curious: I’ve covered this in detail on Episode 4 on the Money Tok podcast. In addition, the second tab of the sheet above has a Financial Freedom calculator that you can use to estimate how much you need to save if you want to quit and just live off your earnings.
3. Oh and don’t forget your kids!
Since we’re on the subject of financial goals — how much should you leave your kids?
This varies widely by family so your opinion may be widely different from mine. But at least in my case, I’d gift my kid a solid education to get him a pedigree so he can get a head start in life. This is, of course, the very definition of privilege but the world is unfair and I’d rather not take chances with his life.
For anything beyond that, I really love Bill Gates’ advice — leave your kids enough so they feel they can do anything, but not so much that they could do nothing.
In other words, I’d love to leave him enough so he has time early in life to figure out could help him earn a fair living that secures his future but which also makes him happy.
Pro Tip: Foolproof process to accelerate your savings 😆
- First thing in the morning, right after you brush your teeth, take a minute to add up all your goals into a grand total of how much you need to save
- The sticker shock will be enough to jolt you wide awake, saving you the need of a coffee or perhaps even cardio of any kind
- Invest the $4 you save on your morning Starbucks towards your kids college fund
- Repeat daily
- Achieve health, wealth and financial freedom
You’re welcome.
If you do nothing else…
Life is busy and I understand planning goals years out into the future might be the last thing on your mind. But at least spare 10 minutes to go over the five Need goals above and set a price and a timeframe for each, as a small step we can take together towards financial security.
Resources
The Money Tok Goals Calculator
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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
