A few lucky people set aside money with only vague ideas for it, only to firm up their plans later and happily discover that they have enough money to make them happen. However, that’s the exception and not the rule.
For the majority of people, careful planning and a long-term perspective are required to achieve financial goals. Partly this is because there’s much to do to ensure funds are available to put toward them. However, the longer duration also plays a vital part too.
Here is how to go about achieving long-term financial goals through careful planning.
Knowing What You Want is Everything
When your goals are twenty or 30 years ahead of you, then you’d think that there is time to course-correct along the way. However, when you’re a decade down the road only to realize that you’ve been on completely the wrong road and going east when you should have been heading west the whole time, then you’ve just lost a decade!
Knowing what you want in life is paramount. Otherwise, what you choose to do will likely be incorrect and only set you back.
For instance, if one of the things that you want to do is to shift to part-time work or to start a business of your own, then you’ll need to save money to support the loss of income. This will be required before a fully funded retirement would begin to payout. Therefore, what is needed to be saved and in which saving or investment vehicles to do so will necessarily vary too.
Not Deviating from the Plan
Once you know what you want, deviating from it to something else will often prevent you from getting there. If you try pivoting, the new thing could be more expensive and require a higher savings rate than adopted already. When the plan changes in the latter stages, then it may be too late to make such a sizable shift.
As the late Jack Bogle of Vanguard fame said, “Stay the course.”
Chopping and changing your plans can play havoc with financial planning. That’s only magnified when they’re long-term multi-decade plans because it’s a little like navigating in space – even the slightest directional error will put the rocket miles off the target. The same is true with financial plans too.
Remove Obstacles in Your Way
When pursuing any financial goals that require many years to obtain, obstacles can impede their achievement.
If you have credit card debt that’s been hanging around for years with only minimum payments being made, it will suck in money and delay the pursuit of other meaningful goals.
Reducing credit card debt can go a long way toward getting started on your long-term financial goals when the debt is cleared sooner, as the blog post explains. So, use an app like Tally to help manage and possibly reduce your credit card debt. It shows you the fastest way to pay down your debt.
Increase Income to Remove Debt Faster
Add to your income to put more towards the outstanding debts. Either through promotion, job transfer, or taking on freelance work, bring more dollars in to pay more dollars out.
Understand that your long-term goals cannot be met if you’re still stuck repaying the past. Credit card debt represents past spending, so the sooner it can be repaid, and the card cut up, the better.
Build a Proper Financial Foundation
Emergencies will come up in life. Whether that’s a medical emergency, an unexpected job loss, or the car needs major repair work on it, they’re unavoidable.
Each time there is an emergency, you don’t want it to stop you from doggedly going after your long-term goals. If it prevents you from saving or adding to investments, then that’s a problem to be avoided.
Build a proper foundation by creating a sizable emergency fund. This is something to do first before initiating a plan for long-term financial goals. Also, anticipate that the emergency fund will get used up, so once it’s in place, set aside a monthly allocation to incrementally add to it. This will ensure by topping it up that it never becomes fully depleted.
How large should the emergency fund be? That depends on whether it’s intended to cover a period of unemployment or to replace appliances that suddenly go wrong together. But air on the side of caution and have more, not less available.
Determine How Much is Required and By When
What are your financial goals and what will they cost?
How Much and By When?
You can either estimate what they’ll cost in the future or use current figures and adjust for inflation along the way. It’s best to use a compound interest rate calculator to determine what it will require to achieve your long-term financial goals.
For instance, when starting from zero, adding $1,000 a month to investments that grow 3% above inflation (after investment costs) for 20 years, what could it accumulate to? A calculator can confirm in today’s money that a total investment of $240,000 could grow to $332,117.83. This ignores any taxation along the way or when withdrawing the funds, depending on whether you’re using a tax-preferred investment vehicle or a ROTH where post-tax funds are invested.
What Can That Get You?
If the lump sum is intended for something specific like the purchase of a vacation home, to pay for a child’s future college expenses, or to fund retirement, then what it can get you will vary.
Educational expenses for colleges have been outstripping inflation for years. This needs to be planned for. A vacation home may not require saving for as long, but real estate can rise sharply in the short term due to supply and demand that disconnects from regional inflation.
With retirement planning, a safe withdrawal calculation often confirms that 3-4% can be withdrawn annually, with inflation adjustments on the yearly withdrawal amount. Therefore, the above calculation can then be used to extrapolate 4% from the $332,117.83 result to see whether saving $1,000 a month will be sufficient for retirement needs? And if not, either longer-term investments or a higher rate of saving will be required to bridge any shortfall.
What Investments Are Oriented for Long-term Results?
An equity orientation is indicated with long-term results. This means an ownership stake in a business, a piece of real estate, a pipeline, or something else. It can be secured through a mutual fund, direct ownership of shares, or purchasing a rental property.
While bonds are useful for their interest coupon payout and usually limited price volatility, they typically provide little upside in real (inflation-adjusted) terms. While cash equivalents almost always lose money to inflation, bonds can just about keep up. However, when needing to grow assets over long periods, equities are what get investors there.
When getting closer to the time when the financial goals are achievable, it’s often prudent to move to a move balanced portfolio of equities and bonds. This is done to avoid a substantial reduction in the value of the portfolio due to a stock market crash that would otherwise substantially delay financial plans.
Also, factoring in expected returns to hit target amounts, projecting good investment returns in the early years and lower ones in the latter years, is prudent.
Using careful planning with long-term financial goals is necessary. Attempting to course-correct later will either scupper or delay plans as a result. Also, being realistic about expected investment returns when planning far ahead in the future is even more necessary because generous overestimations prove costly.