How To Plan Your Financial Goals Like A Financial Planning Master
Many articles have been written about the financial goals and the necessity of saving a portion of any earned income. This means that a percentage of every single source of earned income is set aside, marked, or tracked as money that cannot spend.
This task is mandatory if you want to achieve your future financial goals, and financial stability and start growing some serious financial wealth as a financial planning master.
Saving is the first step and it is the easiest, simplest, but the most emotionally difficult step in setting your financial goals.
Saving money is emotionally painful because spending money is easy and pleasurable. While saving money feels difficult and challenging, like any behaviour, it becomes easier and natural the more you do it.
If you can save 50% of your earned income, you will reach your financial goals more quickly. However, if you have a lot of fixed expenses that you just cannot cancel immediately, you may not be able to save 50% of your income. But, you can start by saving 1% or even 5% of all the income that you receive.
To develop a Financial Planning Master’s mindset, you can start with only $10 a month and then move up your savings rate continually until you are at least over 10% or if you are ambitious 30% or more.
Economics is described as the study of allocating scarce resources. Personal economics is similar, but it is better described as “The allocation of your income that you can’t spend”. If you don’t spend this money, and maybe have it set aside in a savings account, what do you do with it? Do you pay down on a credit card, save it for a car, donate it to a worthy cause, or purchase a bank certificate of deposit?
How do you go about deciding what is a financial goal?
Well, to start with, your monthly savings needs to be divided into four mandatory categories.
For example, if you earn a pay-check (and after all of the taxing authorities take their share) of $1,000 that you can deposit into your checking account and you’ve chosen a personal savings percentage rate of 10%, then you move $100 ($1,000 X .10) into a separate savings account.
Now, you will take this $100 and divide it up into at least the four mandatory categories, along with any other categories that you value. In this way, you’ll have the whole $100 assigned to specific financial duties to meet your financial goals.
What Are The Four Types Of financial Goals?
Here are the four categories in priority order:
- Long Term Saving Account – this is your wealth account. Money gets deposited into this high-interest account or investment and it never leaves, like a one-way valve. The money is invested and the principal is never spent. It will grow into the largest part of your net worth, generating nearly all of your investment income. If you don’t start creating wealth dollar-by-dollar, you’ll never have any.
- Medium-Term Savings Account – is a delayed spending account. This money is marked for things that you want to buy, but can’t afford to purchase with normal pocket money. For example, a house, car, boat, vacation, college fund for kids, planned medical care, clothing, and jewellery. But this also includes maintenance to your home, like a roof, new appliances, new siding, paint, landscaping, remodelling, etc.
- Short Term Savings Account – Pay-down Debt Balances – making extra principal payments on your credit cards, car loans, and your mortgage. By chipping away at these expenses you will eventually eliminate them all, and then have more money available for other categories. Personal debt is the opposite of financial freedom and dramatically makes it more difficult to reach your financial goals. If you doubt this, look at the interest charges you pay each month and imagine if that money had been invested instead.
- Impulse Buy Savings Account – Financial Literacy – books, magazines, newsletters, seminars, software, investment memberships. Also, hiring professional financial advisors, tax accountants, estate attorneys, etc. (Avoid free advice from friends, family or a neighbour) it’s better to buy the best, most expensive professional advice you can afford.
How Do I Set Saving Goals?
As mentioned before, you can put your savings into places that are only limited by your creativity. But these four areas are so important that they need to be continually fed money in on a systematic basis.
If you are missing the first account, the Long Term Savings, you’ll never have the money to start investing so you’ll never receive any investment income. This is pretty much the goal of all personal finance, to help you generate the most investment income. That is why this is the most important of the four categories, to get your money earning money passively.
Do not consider any state retirement accounts or qualified accounts as your Long Term Saving Plan. This is because you do not have direct control to invest the money or receive any investment income until the government decides that you can.
If you are missing the second account, Medium Term Savings, you either can’t buy what you want, or you have to increase your debt. This is moving in the opposite direction of financial freedom – you are reducing the amount of money that you can spend each month by the amount of the debt payment, and you are reducing your net worth by the principal and interest that you’ll be charged.
Another symptom of a lack of Medium-Term Savings is disrepair to your car, home, and health because you don’t have the money for upkeep. Everything physical needs to be maintained, from your teeth to your car, and it costs money to do so. This depreciates the financial assets that you own and puts at risk the most important quality of life – your health.
If you are missing the third account, Short Term Savings, you are simply going to be the victim in the financial game of life. People that are building their wealth collect lots of little interest payments from the people that are destroying their wealth by making lots of little interest payments – money is transferred every month from one group of people to the other.
Which Group Do You Want To Be In?
Well, your Long Term Savings account can automatically put you into the group of wealth-builders and your Medium-Term Savings account would start to extract you from the group of wealth-destroyers.
The Short Term Savings account puts you on track to permanently extinguish all of your debt. The sooner a personal debt is paid off, the more rapidly you can take all of this money and put it into the other categories.
If you are missing the fourth account, Financial Education, you won’t know how to master your Long Term Savings goals, and you may run it straight into the rocks. So it is best if you pay to learn how to handle money and learn where to put it.
But not everyone has an interest in these subjects. Instead of personally managing your money, you can elect to manage your financial advisor. You’ll be spending money and time to hire and manage the advisors to take care of your financial affairs.
How Do I Meet My Financial Goals?
By allocating your savings into these four categories you are addressing the four most important elements of financial management, the Long Term Savings, the Medium Term Savings, the Short Term Savings and the Impulse Buy Emergency Contingency Savings needs of the future.
By taking these steps, you’ll be making certain that:
- Your investment income will always increase by adding to your Long Term Savings goals
- You’ll have money available for extra expenses with your Medium SavingsGoals and
- Your net worth will always be increasing with a Short Term Savings account.
- Finally, you’ll intelligently learn how to lower your investment risk, raise your investment returns, and lower your tax liability with your Financial Education account.
The only source of money to build these critical financial functions is to increase your income and net worth. Financial stability is your savings – so you simply have to do it.
Try to fund these accounts simultaneously – do not focus only on debt or only on education because it can be financially detrimental to do so.
For example, let’s say that you want to pay down your debt so you don’t contribute anything to Long Term Savings account.
This may mean that if you don’t have any investments, your investing skills will be underdeveloped. You will not know how to invest once your debts have been paid off, you’ll have no investment income to manage, and you won’t be looking for investment opportunities because that is something you can’t afford right now.
Furthermore, it will be harder to get into the investing game later, you’ll have more to learn in a shorter amount of time, and may just avoid it altogether and put Long Term Savings account money into a low-paying account.
How much do you allocate among the four categories?
Anything above zero!
It is up to you, and your financial situation will fluctuate and be different from others.
Just to get some starting percentages, below is an example of allocation. It is not a recommendation for everyone, it is just what has worked in the past:
If you start with a savings rate = 20% of all after-tax income (This does not include pension contributions, medical savings accounts, or other deferred/qualified withholding).
This means that 20% of all cash income that hits your checking account each month is set aside into these categories:
- Long Term Savings Account receives 50% of the total savings each month.
- Medium-Term Savings Account receives 20% of savings each month.
- Short Term Savings Account receives 20% of savings each month.
- Impulse Buy Financial Education receives 5% of savings each month.
- And that leaves 5% for other categories each month.
Here is the example of a $1000 balance on your earned income after all taxes and expenses taken out:
- Long Term Savings Account – ($1,000 X .50) = $500
- Medium Term Savings Acount – ($1,000 X .20) = $200
- Short Term Savings Acount – ($1,000 X .20) = $200
- Impulse Buy Savings Account – ($1,000 X .05) = $50
- Other Categories – ($1,000 X .05) = $50
The percentages detailed above are an example of how to allocate regular income savings.
But, you may also receive recurring or ongoing income, in addition to a maybe a one-time inflow of money. If there is any one-time influx of money (garage sale, bonus, extra project), then take 90% of the proceeds and split it among the four accounts, and the other 10% is just yours to spend.
You can create your own money rules for different types of income; you can tell by the allocation percentages that the primary focus is to build up the balance of the Long Term Savings Account.
The amount of money that you can save from every source of income is the key to a brighter financial future.
On the contrary, a risky and dimmer financial future awaits those that refuse to systematically save money. So be sure that you take the steps necessary to set your savings aside and then simultaneously divide them among the four mandatory accounts by consistently allocating money to them.
You don’t have a financial foundation without these four accounts, but with them, you can build as high a financial wealth as your ambition takes you.