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