Tag Archives | financial goals

The Big Picture

Big PictureThe Big Picture

There are three important components to a financial plan: an assessment of your current financial situation, a vision of what you want for the future, and a strategy for how to get from one to the other. The first part is easy, because it is simply a case of putting together a few numbers and doing some analysis. This is an objective exercise which has a clear answer. The hard part is setting the vision for the future. Many people struggle to uncover what they want to do with the rest of their lives and how money can help them achieve the things they want to do. Yet the power of a financial plan is as much in the vision as it is in the strategies. Those who have a strong, clear, unified vision of what they want will achieve more than those who don’t.

The vision for a financial plan is not about how much money you want to make, but about how you want to live your life. It goes beyond the physical trappings of life such as fast cars, flash houses and jet-setting around the world to the very core of what brings about happiness. Things like security, having a comfortable life free of financial stress, being able to spend more time with family or engaging in pleasurable activities are the ultimate drivers of financial strategies. A great way to get clarity around your vision is to pick a point in time in the future and describe a day in your life at that time. Where are you living? Who are you living with? How do you spend your time? What are the things that are really important to you then? The more detailed a picture you can paint, the easier it will be to achieve your vision.

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Have Your Cake

CakeHave Your Cake (and Eat it Too)

When money is limited, we need to make choices. By spending money on something we want, we forego being able to spend the same money on something else. Wouldn’t it be great, though, to have your cake and eat it too! Believe it or not, there is a way.

From an early age, we are taught to think of goals as being mutually exclusive. If you spend your pocket money on lollies and ice creams, you won’t have enough to go to the movies. If you want a trip to Hawaii, you can’t have a new car. One technique for getting around mutual exclusivity is to be very clear on how much money your goals require. Saving for retirement is a commendable goal, but needs to be balanced with saving for shorter term goals so you can enjoy life. Use a retirement calculator  to estimate how much money you will need to save for your retirement. Any additional savings can be spent on other goals without feeling guilty.

Another way of getting around mutual exclusivity is to look at how you frame your goals. Instead of having a goal of going to Hawaii, reframe the goal in terms of what is really important to you about that goal. For example, you could reframe it as “a memorable holiday in a tropical paradise by the sea”. Your new car goal could be reframed as “upgrade my car to something more modern and reliable”. Where else could you have a memorable holiday in a tropical paradise by the sea, at a lesser cost than Hawaii? Can youupgrade your car without getting a new one? By being able to make small sacrifices on the quality or quantity of your goals, you open up possibilities of achieving more of them.

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Lessons from Failure

The America's Cup Trophy on display at the announcLessons from Failure

New Zealand’s failure to bring home the America’s Cup is truly disappointing and also a reminder of what it takes to succeed. Winning a yachting regatta has many parallels to achieving financial success. To begin with, you need to be absolutely determined and focussed on achieving your goals. Having set your goals, make a plan. This includes thinking about what resources you will need. A team of experts will be required to provide technical knowledge and skill to build the fastest boat, provide advice on winds, tides, and race tactics. As well as a fast boat, you will also need a good crew to help you along the way.

Being the fastest isn’t enough to win; you also have to take the shortest route. Stay on course is about mapping out clearly the route you need to take, knowing what your current position is, being aware of adverse conditions that might take you off course, and knowing how to get back on track.

A regatta is won one race at a time, so while it is important to focus on the ultimate goal of the big prize, this can only be achieved by focusing on each step, looking at how to continuously improve your performance. Every race carries a risk of loss. To win a regatta doesn’t mean you have to win every race; it means you need more wins than losses. Without taking the risk of a loss, you lose the opportunity to win. Losing is not a reason to give up. It just means that next time, you apply the lessons you have learned and do it better.

When it comes to your financial future, be clear what your goals are, have a plan, get expert help, have a willingness to take risks and the determination to succeed.

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Life is More than Money

Life is More than Money

One of the best things about being on holiday is being able to take a few quiet moments to reflect on life and to appreciate being able to do things that bring pleasure rather than selling your time and skills for money. Where you spend your holiday and who you spend it with will give you some good clues about what is important to you in life. What is your ideal holiday?

  • Do you enjoy spending time with friends and family? This is known to be one of the most important determinants of happiness along with good health.
  • Do you enjoy camping or staying in a holiday home? No doubt you enjoy the simplicities of life and for you, happiness does not necessarily come from expensive possessions.
  • Do you enjoy travel and adventures? These bring excitement, new experiences and the possibility of new friendships.
  • Do you enjoy curling up with a few good books?  Perhaps you are a person who likes to have time out and feed your mind.
  • Do you enjoy spending your holiday at home? For many people, there is nothing better than being in their own home where they feel comfortable and secure.

Thinking about how you like to spend your time when you are not under pressure to earn can help you set your financial goals. Life is not about making as much money as possible, it is about using the money you have in the most effective way to enable you to do and have the things that give you the most enjoyment, whether that be family, friends, adventures, time out, comfort or security. Once you have identified what these are (and this is not always an easy task), make them your priorities and set your financial goals around them.

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The ‘As If’ Principle

The ‘As If’ Principle

One of the most useful techniques for planning ahead with your money is what I call the ‘As If’ Principle. It is a really simple technique that clearly identifies in advance whether a specific goal is achievable, while at the same time, helping you achieve it! The time to use this technique is when you have a future goal which has the effect of either reducing your income or increasing your expenses on an ongoing basis. Examples of such goals are:

  • Choosing to retire or work less
  • Sending your children to a private school
  • Preparing for possible redundancy
  • Planning to take parental leave
  • Moving from full time to part time work
  • Taking a job with less stress and less pay
  • Giving up your job to study at university
  • Buying your first house
  • Buying a bigger house with a bigger mortgage
  • Borrowing to buy a car

 Here is how it works, and it really is simple!

Step One: Prepare a new budget for yourself, ‘as if’ you are already taking your planned action; that is, a budget based on less income or increased expenses.

Step Two: Start living according to your new budget ‘as if’ you are already in your goal situation.

Step Three: Save the difference between your current and planned income or current and planned expenses into a savings account.

 This allows you to test your ability to achieve your goal, while adding to your savings. The more time you have to plan ahead, the easier it will be to test your budget, increase your savings and achieve your goal. If you find you are unable to live on your new budget without dipping into your savings, review the cost or timing of your goal and whether it is achievable.

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What is Your Why?

What is Your Why?

Setting your financial goals is not a simply a process of deciding how much money you need. Examples of common financial goals are:

  • To save $5,000 over the next year
  • To save $500,000 for retirement
  • To have a passive income of $50,000 a year

Goals such as these are unlikely to be achieved. That’s because money has no intrinsic value; its value comes from what it is used for. Unless you are clear about what purpose money serves in your life, you will never be motivated to accumulate it. Finding your purpose is simply a matter of asking yourself ‘why’. For example, the reason why you have a goal of $50,000 passive income a year might be ‘to achieve financial independence’ . Now ask yourself why financial independence is important. The answer might be ‘to have financial security’. In turn, the reason why financial security is important may be ‘to provide for my family’. The trick is, to keep asking yourself ‘why’, until such time as your discover what is fundamentally important to you. Ultimately, you may uncover higher level objectives such as pride, satisfaction and personal fulfillment. These are the things that will motivate you to achieve your financial goals.

For most people, lasting satisfaction and fulfillment come not from possessions but from intangibles such as relationships with family and friends, good health, or broadening your life experience through education and travel. When you truly understand what motivates you and what you want to achieve in life, rewrite your financial goals to include how much money you need and why, for example, ‘to achieve financial security and independence through having a passive income of $50,000 a year’. Writing your goals in this way makes them much more meaningful and powerful and more likely to be achieved.

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How to Set Goals and Achieve Them

Your Financial Goals

There’s one significant difference between people who succeed in life and those who struggle; their ability to set goals and achieve them. To have what you want in life, you can’t just sit back and expect it to happen. Success means different things to different people and when it comes to setting financial goals, success is much more than having a lot of money in the bank. A big bank balance is only a good thing if you set out amass a lot of wealth just for the sake of it. Ideally, if you want to enjoy life the aim is to have enough money on hand at the time you need to spend it.

The purpose of goals is to give you a long term vision and to increase your short term motivation. Having goals focuses your mind on what you need to know and do to be successful, so that you can make the most of your life. Goals should be precise, clear, and meaningful. Set your goals too high and you will quickly lose motivation if you don’t succeed. Make your goals too easy and won’t be motivated either. You are much more likely to achieve your goals if you write them down and if you break them down into small steps so you can measure your progress.

When it comes to setting financial goals, it is hard to contemplate achieving long term goals if you find yourself unable to save or burdened with short term debt. In that case, you need to set goals in two stages. In the first stage, plan to get rid of debt and start saving. Once you have achieved that milestone, you will be in a financially sound position that will enable you to move forward and set longer term goals.

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New Year’s Resolutions to Build Wealth in 2011

Five New Year’s Resolutions

Regardless of whether your financial goal is to create enough wealth for financial security or a multi-million dollar empire, the starting point is the same. Fortunes are only made on a solid financial base and to build one means getting rid of some old money habits and developing some new ones. Here are five resolutions that will help you build wealth in 2011:

 

Spend less than you earn

Spending more than you earn will use up your savings or take you into debt. Spend less than you earn and you will save. It’s a principle that is simple to understand but very hard to do. Get it right, throw in some compound interest on your savings, and you will add to your wealth effortlessly.

Make the most of KiwiSaver

If you haven’t joined KiwiSaver make it one of the first things you do this year. It’s an easy way to double or even triple your money. If you are already a member, get advice on whether your money is being invested in a fund that is appropriate for your needs.

Set up an emergency fund

Life is full of unexpected surprises, some of which can be expensive. Having money on hand will help you stay out of debt, particularly expensive debt such as credit card debt.

Pay off debt

Just as compound interest on savings helps make your wealth grow more quickly, interest on debt will destroy wealth and debt repayments will make it more difficult to spend less than you earn.

Review your life and income protection insurance

Protecting your wealth is just as important as creating it. The death of a life partner or the loss of your or your partner’s income through health problems can see your life savings quickly disappear and your standard of living fall.

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