Planning to Reach Your Goals

 

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In order to construct your personal wealth-building plan, you need to closely consider what you have now and what you want in the future. As a necessary part of the process of setting a goal, you'll want to make the goal measurable, that is, reduce it to a monetary amount, and set a deadline for attaining it.

Most financial plans are geared to something that will happen in the future — often in the distant future — such as saving for your children's college education, or saving for retirement. Because the cost of most things goes up over time, and because you'll want to invest your savings in such way as they will increase in value as time moves on, determining how much to set aside each month (or whatever your saving period is) is a bit more complicated than just dividing the current cost of the item by the number of savings periods you'll have before you reach the deadline that you set for attaining the goal.

You can closely estimate how much attaining your goal will cost and whether you will reach it based on a particular saving and investment plan, by following these steps:

First, estimate the cost of the goal at the date you plan to attain it. Take the current cost of the goal and adjust it for inflation up through the time you will reach the goal.

After investigation, you believe that the cost of your goal (which is currently $50,000) will go up about 4.5 percent per year for the next 25 years. Assuming you want to reach the goal at the end of year 25, you have to have accumulated $150,270 to do so.

Second, take the amount of your current savings on hand that you will earmark for the goal and figure how much it will grow between now and the date on which you want to reach your goal. (The process of doing this is identical to that of figuring how much a particular item will increase in cost over time, except that instead of an estimated inflation rate, you'll use an estimated growth rate that should exceed inflation.)

Third, determine how much you will periodically save to reach your goal, and how much this investment will increase over time based on what you estimate its yield will be over the life of the investment. Unless you will accumulate these savings in a tax-free form (such as municipal bonds), or tax-deferred (such as within a qualified retirement plan, or an insurance policy), you should make this computation based on after-tax yields.

Fourth, add the amount of your projected investments as of the date you wish to attain the goal (amounts determined under the second and third steps, above) and compare this amount to the amount of your projected future cost of the goal.

If the amount of your projected investments is greater than the amount of your projected cost of the goal, you'll know your saving and investment plan should work out to allow you to attain your goal. (This will be true if the various assumptions you made in the course of setting up your plan are correct, and do not change for the worse over the course of time).

If the amount of the projected cost of your goal exceeds what your saving and investment plan will generate, you'll need to consider making changes necessary to reach your goal.