Quantify and set financial goals

How investment multitaskers can prioritize competing financial objectives.

Christine Benz 6 February, 2018 | 6:00PM
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The following is part of our Financial Planning To-Do List special report.

"Do you really need another fidget spinner?" I heard a mom say in exasperation near the checkout counter at Walmart. "Weren't you just telling me you want to save for a new Xbox?"

Wise parents start early in counseling their kids on setting financial priorities and delaying gratification today in favour of even greater gratification at a later date. That's good, because those types of challenges--albeit in different incarnations--will be with us throughout our lives. New grads must decide between student loan paydown and saving for homes, cars and weddings; new parents must wrestle with saving for their own retirements and funding university for their kids. Late-career accumulators must balance showing off the fruits of their labours--vacation homes and luxury cars--with financing the retirement years that will be here before they know it.

What's complicated is that in contrast to the $4.99 fidget spinner, not every financial goal adults might seek to achieve carries a clearly marked price tag. Undergraduate tuition fees, for example, can vary radically depending on your province of residence and the field of study; a business degree in Ontario will cost a little over $10,000, whereas a social sciences degree in Quebec clocks in just under $3,000, according to Statistics Canada. Retirement costs can vary even more dramatically, depending not just on planned in-retirement lifestyle considerations but crucially on the retiree's own life span.

We've created a Goal Planning Worksheet to help you enumerate and quantify your various financial goals over the short term, the long term, and in between. Armed with information about what goals you'd like to achieve and what they'll likely cost, you can then evaluate the trade-offs and prioritize them. This will also allow you to make more informed decisions when setting your savings rate, which I discuss here.

Step 1: Document your goals.

The first step in the process is to document your goals by time horizon. Group them into one of three bands: short-term goals (achieve in five or fewer years), intermediate-term goals (five to 15 years from now) and long-term goals (15 years or more in the future).

Specify the date by which you hope to achieve them as well as the duration for multiyear goals--four years for college, for example. (Fingers crossed it won't take longer!) Specifying the duration of your retirement requires you to whip out a crystal ball and predict your life expectancy.

As you go through the process of enumerating your goals, be as specific as possible--for example, if you have three kids that you'd like to help put through university, make three separate entries. And don't forget debt paydown--whether a mortgage, student loans or credit card debt--on your list of financial priorities.

Step 2: Quantify your goals.

The next step is to estimate the cost of each of your goals. For short- and even some intermediate-term goals, this should be straightforward, but estimating the cost of multiyear, long-term goals like retirement and post-secondary education is trickier. The big wild card is inflation: While it's currently quite low by historical standards, it's reasonable to assume at least a 2% to 3% inflation rate for longer-term goals, and an even higher rate for university. (Average tuition fees in Canada have been increasing faster than the general rate of inflation for several years, and there is little to suggest this trend may change soon.) This calculator allows you to inflation-adjust your future expenditures based on your own inflation rate inputs.

If you'd rather not hand-calculate your savings needs for retirement--and there are a ridiculous number of variables to consider--there are a host of retirement calculators to assist in that job and assess whether your savings rate is on track.

Step 3: Prioritize your goals.

Finally, prioritize your goals by numbering them in the left-hand column on the Goal Planning Worksheet. Of course, you want to let your own wishes inform your priorities, but give plenty of weight to what makes sense from a financial perspective and what will deliver the highest return on your investment.

The following hierarchy will make sense in many different situations:

  1. High-interest-debt paydown/emergency fund (tie)
  2. Retirement savings
  3. Education savings
  4. Other short- and intermediate-term goals (within reason)

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About Author

Christine Benz

Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

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