Support My Efforts By Visiting The Advertisers


This is a personal blog. The opinions expressed here represent my own, not those of my employer and is not intended to malign any religion, ethnic group, club, organization, company, or individual.

Financial Goals (Part 1 of 8)

>> Saturday, February 6, 2010

Dreams will remain dreams unless action is taken towards achieving them. Having financial goals, provides the direction to plan personal finances towards those goals and to measure the performance of achieving them.

Goals should be SMART: Specific, Measurable, Achievable, Realistic and Timely.

Areas to set goals:
- To protect against financial risk
- To protect against living too long
- To pay for raising children and their education
- To save for a specific purpose
- To support retirement
- To pass on wealth
- To minimize taxes
- To be financial independent and achieve financial freedom

Each of the financial goals can be grouped into short, medium and long term goals. Each will also need to be assigned a monetary value using the time value computation and the time frame for its accomplishment.

Some times these goals can be conflicting, like supporting a higher standard of living during retirement and wanting to retire early. With the limited financial resource and based on current financial capability, goals will need to be revised and prioritized.

Penning down goals instills discipline and motivates towards achieving them.

Time Value Of Money
The concept of time value, is compound interest. Compound interest is simply interest earning interest.
The parameters for each computation are Present Value (PV), Future Value (FV), Payment (PMT), Interest (1/Y), Number of periods (N). A financial calculator needs to be used or a spreadsheet program like Microsoft Excel or OpenOffice Calc will work as well.

For example, how much to save yearly to have $50,000 in 5 years for down payment of a property at an investment return of 5% per annum?
PV = 0; FV = 50,000; PMT = ?; 1/Y = 5; N = 5.
Therefore, PMT = $9,048.74 yearly or dividing by 12 = $754.06 monthly.

Another example is how much is required to have a retirement lifestyle expense of $50,000 yearly from age 65 to 85, assuming an investment return of 5% and inflation of 2%?
PV = ?; FV = 0; PMT = 50,000; 1/Y = 5 - 2 = 3; N = 85 - 65 = 20.
Therefore, PV = $743,873.74.

A separate example for financial independence is how much is required to have a life-time lifestyle expense of $50,000 yearly (one year form now), assuming it is to be solely supported by an investment return of 10% and inflation rate is 2%?
A sum of 50000/(10-2)% = $625,000 is needed.

These goals need not be precise, a good estimate is sufficient as they are based on assumptions like investment returns and inflation, which are not constant. These goals will need to be reviewed when personal circumstances change, new economic developments, unexpected events, etc. It will also be used to monitor quantitatively how close to achieving them.

It is best if the ideal situation amount and worst case scenario amount is worked out, and the amount necessary would be some where in between. Contingency plans should be thought through so that in the event the worst happens (i.e. low investment return, loss of capital, etc), it would not completely derail the plan and alternatives are available.

No one plans to fail, but most fail to plan. Success does not happen by chance, it requires planning and the proper execution of the plan.

Back to contents.




The owner of this blog does not share personal information with third-parties nor does the owner store information is collected about your visit for use other than to analyze content performance through the use of cookies, which you can turn off at anytime by modifying your Internet browser’s settings. The owner is not responsible for the republishing of the content found on this blog on other Web sites or media without permission.

Blog Comments

The owner of this blog reserves the right to edit or delete any comments submitted to this blog without notice due to;

1. Comments deemed to be spam or questionable spam
2. Comments including profanity
3. Comments containing language or concepts that could be deemed offensive
4. Comments that attack a person individually

Terms and Conditions

All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information.

This policy is subject to change at anytime.

About This Blog

To promote the education of individuals for the need to have a healthy lifestyle and wealth management through proper financial planning, particularly in investments.

Top Blogs


Top Sites

  © Blogger templates Sunset by 2008

Back to TOP