Identify Your Financial Finish Line -Set Your Goals

step 2

Once you have defined your Financial Starting Point in Step 1, you can now have a bit fun dreaming and planning for your Financial Finish Line, or your financial goals. Setting goals should be fun because it envisions success. You plan for the successful outcome achieving a big purchase, taking that long dreamed of vacation, helping your children or grandchildren succeed at school, or living your dream of a financially secure retirement.

When establishing your financial goals, we usually think in terms of saving for a specific event or purchase. Whatever your financial goal, you will need to estimate the final dollar amount needed, and sometimes this can be simple and straight-forward or it can be more complicated and difficult to envision.

Example:  When establishing a financial goal, begin by doing a little preparation and research. First begin by identifying the expected dollar value of the financial goal, as the following example case scenarios suggest:

  • If you desire a new car, then first determine the type, function and features you require and desire.
  • If you are planning for a child’s education, try to think what type of career your child might wish to pursue and the corresponding educational path that will be required. Once you have identified the potential education path, create an expected annual education budget for your child. The education budget should anticipate the expenses (housing, food, transportation, tuition, books, etc.) and the sources of funding (RESP, savings, student employment, grants, scholarships, etc.). By creating an annual education budget, you can then simply multiply the annual expenses and funding by the number of years the anticipated education path will take to complete. This then becomes your estimate of your financial goal’s dollar value.
  • If your goal is for a financially secure retirement, then begin by dreaming and envisioning what you would like your retirement lifestyle to be. Will you live in the family home? Will you travel? Will you be a more active volunteer?

Once you have an idea what your retirement lifestyle will be like, you can now take your Household Budget used in Step 1 to help you to estimate your income and expenses in your anticipated retirement lifestyle. Beside each of the line items in your Household Budget, list your anticipated income and expenses in retirement. This is what’s called a Retirement Estimation and is what we use to determine your Financial Finish Line.

Members’ Note:  InvestingForMe provides members with comprehensive tools in our InvestingForMe Tools section to assist with the planning for expenses such as children’s education, cost to purchase/finance/lease an automobile, as well as a Retirement Estimation calculator.  All of these tools can be saved to your My Folder section for future reference and updating.

Once you have completed an estimated retirement Household Budget, you can now estimate your retirement income surplus or shortfall. Any shortfall will need to be made up from your savings and investments. The estimated shortfall in retirement income can be used to estimate the dollar value of the income needed from accumulated savings by the date of your retirement. This estimate becomes your Financial Finish Line or goal.

Note: Keep in mind when defining your financial goals that the length of time between your Starting Point and the date established for your Financial Finish Line will influence two important aspects of your investment portfolio design – the asset categories to be held in your portfolio and ultimately your success in achieving the financial goal.

Remember: In general, there are two rules to live by when it comes to identifying your Financial Finish Line:

  1. The shorter the amount of time available for the achievement of your financial goal (also known as a Time Horizon), the more conservative the investments to be held within the portfolio, and
  2. The longer the amount of time available for the achievement of your financial goal (or Time Horizon), the greater the uncertainty around your family’s anticipated circumstances. (For example, if your goal is to retire in 30 years, will you have the same job or career for the full 30 years? Will you be married? Will you have more children? Will you be healthy? With a longer Time Horizon comes greater uncertainty.)

You can now move on to Step 3: Determine Your Investment Time Horizon