When it comes to financial planning, many people look at reaching their goals one at a time. Taking this linear approach means that they save enough money to reach their most immediate goal, before thinking about the next one.
However, it is important that you consider all your different financial goals at the same time to give you a better chance of achieving all of them. It also helps you anticipate potential problems that you might face in the future.
As a financial consultant, I have met many clients who tell me, “I never really think so far ahead. I take things as they come.” My reply is “That’s exactly why you need to start penning down all your financial goals and have a comprehensive plan to achieve them.”
Writing down your goals will help you determine if they are realistic, or if they are just “dreams”. That’s the difference between a dream and a goal. A dream is something you want but may not be able to get, while a goal is something that is within you reach if you work for it. Everyone should be setting goals and not dreams.
In my experience, those who look at their financial goals linearly are likely to fall into one of the following three pitfalls.
The Debt Trap
This is the biggest pitfall of all. Many people in their twenties do not plan for the long term. As such, they spend most of the income they receive, especially if they are still single and do not have any family commitments.
However, reality suddenly sets in when they decide to get married, and realise that they need to pay for the wedding, buy a new house and pay for the renovations – all at about the same time. Most newlyweds are caught off guard and end up taking up loans to pay for these expenses.
They convince themselves that are young and energetic enough to earn the money they need to repay these loans. While this may be true, these debts usually set them behind their peers by a couple of years. Those who are not weighed down by debt can can already start planning for their children’s education, a second property or even their retirements.
Start saving as early as you can to avoid having to take on debt. The best time to begin is when you get your first pay cheque, as this marks the biggest pay increment you are likely to get – from earning zero to having a regular salary. When you just start working, your expenses will take a little while to play catch up with your income.
This is another painful pitfall that happens to those who do not plan for all their financial goals at once, and only focus on reaching the first one. Many will end up spending too much on their first goal – such as splurging on a wedding because they feel they have saved enough to afford a lavish one.
They also mistakenly believe that they can easily build up their savings again to reach future goals. However, they do not realise that they were able to save as much as they did the first time because were still single with no major financial commitments.
Once they buy their first homes, the mortgage become a major drain on their finances. Having a child will also add to their financial burden significantly. Only then does it become apparent that their ability to save is far less than what it used to be. To avoid overspending, you need to budget ahead of all your financial goals, so you are prepared for any obstacles that may arise.
Lack of Time
This is the most common pitfall. Ask 10 people in their fifties whether they wish they had started investing earlier in life, and easily 7 of them will give you a resounding “yes!”. Starting the process earlier gives you more time to grow your money, and maximises the effect of compounding interest on your savings. It also gives you a buffer to recover if a severe market downturn slashes your retirement savings.
Despite these advantages, many of young people are too focused on spending in the short-term – whether its travelling to see the world, or paying for expensive enrichment programmes for their children.
Avoid the pitfalls with GoalsMapping
The linear approach to achieving your financial goals will lead you to one of the three pitfalls highlighted above. There are only two ways to overcome this problem – either you have a very high earning potential that allows you to afford your goals as they come, or you need to have a robust financial plan that you stick to.
The process we have developed, known as GoalsMapping, can help you to plan far in advance to give you the best chance of reaching all your financial goals, not just the next one on the list.
It is also by far the most detailed way of financial planning, and has a high chance of working if you follow the plan diligently. Start mapping out your goals today and the path that your financial life is likely to take will become much clearer.