When most people are asked about their major financial objectives, they tend to play safe with general answers like achieving financial stability, but the truth remains that not many of us give due consideration to our financial objectives in life. In our struggle to meet everyday expenses, we tend to forgo the most essential objectives.
This lesson deals with identifying and meeting your ultimate financial goals. However, it is easier said than done as fulfilment of one goal might set back the approach towards the other considerably. Your decision to pay for your child’s education could end up creating a dent in your retirement savings. This calls for a need to not just classify financial objective but to also prioritize them.
Apart from chronically arranging your goals as per priority, you should work towards the more important ones first. Fortunately, you have time on your side, which is an advantage if you look at the potentiality of compounding. Even an insignificant amount of money has the power of earning interest and considering that with each passing year, the interest rate gets applied on an increasing sum of money, leads to a higher interest amount than the preceding year.
For instance, if you keep aside the money equivalent of a bar of candy, say about 65 cents every day and invest it in a tax-deferred account that pays 5% a year. When compounded monthly, the saving that accrues at the end of 30 years would be somewhere around $16,470. Needless to say, to reap the most of the compounding benefit, you have to start early in life.
Take the example of two siblings who decide to invest in Individual Retirement Accounts, which earns 8% annually. The sister invests at the age of 20 and every year she puts $3000 in her IRA till she turns 30. The brother, on the other hand, starts at the age of 30 and continues to pay $3000 per year for the rest of his life. Which of the two, do you think will earn more by the age of 65?
It will be the sister as she invested a good 10 years ahead of her brother and her savings would be more than $642,000 while the brother would have about $518,000, almost 20% less. Of course, the best option would be to start early and to keep adding to the account every year. If both of them would have started at 20 and invested $3000 per year till retirement, each would have made around $1.2 million. The idea is to make the most of the available time.
To start off, make a list of the things that can be classified as financial goals. These could range from clearing your debts to buying a Lamborghini, anything that will give you a sense of security or happiness in the long run. You can consider goals like investing in real estate, paying for your kid’s college or just amassing enough wealth to live a comfortable post-work life.
Once you are ready with the list, it is time to prioritize and determine which of these listed goals are the most important for you.