There are events in life that carry a financial goal with them: buying a house, saving for your children’s education. And smaller ones, like buying a new car. A car is a smaller expense than a house, but for most people still one that goes beyond pocket money.
So how to combine all these different goals, varying in both timescale and scope? The danger could be that by focusing on the short-term needs, your retirement savings are too low. When your investment base is low, the compounding effect of time will also be lower. Then you may end up with a retirement income that is not enough to cover your needs and the standard of living you want in later life.
The flipside is equally true: when you focus on retirement and invest for maximum long-term returns, you may fall short in your needs that are closer in time. For example, you may not be able to buy the house you want because your finances are focused so much on saving for retirement.
The key is to define how important the various goals are to you and how much you want to put aside for them, based on your income level now and in the future. That brings us to 3 steps:
Step 1: Prioritize Your Goals
How important are the goals to you? Which one has priority? And in what order do the other goals follow? Make a list of your goals and allocate your savings and investments based on that order.
For families, funding for their children’s college years could be first priority, as it’s a crucial step for their future. Other goals may have to make way for that.
For people in a different situation, paying for education may not be an issue at all, so they can focus on different goals. Everybody needs to make their own decisions.
Step 2: Know What You Can Spare
How much can you set aside for saving? Define what percentage of your income you can spare to put into saving and investing without getting in trouble with your daily spending. This amount of spare money puts a realistic perspective on which goals are achievable and which you might have to let go.
Step 3: Find Extra Income Sources
Following on closely from savings item is the question: do you have other income sources that can help achieve your goals in the timeframe you are aiming for?
If you are early in your career, then you may expect pay rises or bonuses in the years to come. That means that your current income level is not representative of your future earning power. Hopefully there is more to come. That gives you more for saving and investing. The more likely other future income sources are, the more you can take those into account in achieving your goals.
If you are on the brink of retirement, however, a salary increase is unlikely, and other income from other work will disappear. That changes your income position downwards, and with it your room for savings.
In Summary
Decide which goals are the most important to you and dedicate your investable money in order of importance. Look what you can set aside given your usual expenses and see if there is extra financial room on the horizon. Then you may achieve more financially than you had hoped for.
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