Very few things can beat the excitement (or relief) we feel when we get our paycheck. With that hard-earned money, you may have all sorts of plans in mind — pay off your debts, splurge on a staycation, save up for your dream home or invest so you can reach financial independence quicker.
But for most of us, money is a scarce resource. And while we may have multiple financial goals, the reality is that we cannot reach all our goals at once. This means we have to make choices and prioritise the goals that are important to us. That, in essence, is what financial planning is all about.
Understanding how to prioritise your goals allows you to strategically put your money to work and plan your finances so that you can build the life you want.
Start by listing your financial goals
The first step in financial planning is figuring out what your goals are. More often than not, people do not have their goals written down. Sure, you might have a vague idea of what you want to achieve, but it is hard to put a plan in action if you don’t have your financial goals concretely defined. So it helps to take some time to reflect and put all your goals down on paper (or a Word document).
Though the following list is not exhaustive since goals vary from person to person, it can help you get started with crafting a goals-based financial plan:
- Christmas gifts fund
- Parent’s medical and caregiver fund
- Wedding fund
- Student loan debt
- Emergency fund
- Home renovation fund
- New house
- New car
- Business venture
- University fund for kids
Get specific with your financial goals
Once you have all your goals written down, make them specific and measurable. It is not enough to just say, “I want to have an emergency fund”. How much money do you need in your emergency fund and how long will it take you to build it up?
Set a time horizon and value to your financial goal
For each of your goals, set a time horizon and a value to it. For instance, you may want to retire in 40 years with $4 million, or you may want to pay off your $20,000 student loan debt in 1 year.
How to estimate how much you will need for each goal
Understandably, it’s not easy to know how much you will need exactly for each of your goals, but you can make broad estimates and educated guesses based on the information you have now. The consensus for an emergency fund, for example, is 3 to 6 months of your living expenses.
You might even have to do some research to figure out how much you will need for a particular goal. Thinking of sending your child to a university in Australia? Check the tuition fees to get a rough idea of how much it would cost you.
Prioritise your financial goals by order of importance
Some of your goals are must-haves (a fully-stocked emergency fund or retirement savings), while others can be nice-to-haves (a lavish wedding or buying a second property). So how do you identify which goals you should be paying attention to first?
Adopting the Eisenhower Matrix in your financial planning
The Eisenhower Matrix can be one framework to guide your decisions about your goals.
First ask yourself, “Which of my goals are important and urgent?”. Important and urgent goals are ones you must achieve to avoid putting yourself in financial ruin. So they should be your top priority. These include having a well-stocked emergency fund, getting enough insurance coverage and making sure your credit cards are fully paid off.
Once you have identified the important and urgent goals, then work on the goals that are important but not urgent. For instance, you’ll need a retirement fund to pay for your golden years. And if buying a home is on the horizon for you and your partner, then it makes sense to prioritise this goal as well.
Goals that are not important but urgent are ones that you can put off for a while if you do not have the money right now. This could be that lavish wedding that you have always wanted or taking a sabbatical. It would be nice if you can achieve these goals, but it is okay if you do not get to them as quickly, if at all.
As you list down your goals, you might realise some of them are just not important and not urgent enough to you. Maybe you thought that you wanted a staycation or a new car, but upon reflection, these goals don’t fit with your values or the life you want to build. So you can eliminate them from the list and focus on the ones that do matter to you.
Work out how much you need to save and invest for each financial goal
Let’s say you’ve narrowed down and ranked your goals as such:
- Pay off $5,000 in credit card debt in 2 months
- Top up $10,000 in emergency fund in 6 months
- Pay for $50,000 for a home down payment in 5 years
- Save up $4 million for retirement in 40 years
- Put $30,000 into wedding fund in 2 years
Now it is about figuring out how much you are going to set aside for each goal and where to put that money. Think of it as setting up different buckets for different goals. Each bucket will get a portion of your savings based on the urgency and the importance of your goals.
Funnel most, if not all, of your monthly savings towards the immediate financial obligations — credit card payments and emergency fund — before moving on to the rest of your goals on your list. Your emergency fund should be in a liquid account that earns a return that beats inflation.
With your finite savings, you can opt to put a larger portion towards your short-to-mid-term goals. Since you will need this money in the nearer term, invest it in a conservative portfolio such as Endowus Cash Smart to ensure that your funds are not exposed to too much market volatility.
For long-term goals such as retirement, it pays to put your savings towards an investment portfolio with an allocation to growth assets so that you can reap the benefits of compound returns. The good thing is that the earlier you start investing for retirement, the less money you will need to set aside to grow your retirement pot.
Review your goals and adjust when necessary
You have prioritised your goals and created your automatic investing plan for each bucket. With the bulk of your financial planning already done, now it is about making sure that you stay on track towards your goals.
Review your savings and investments from time to time — we recommend once or twice a year — to ensure that you are still on the path to hitting your financial milestones.
As much as we would like to stick to our original plan, sometimes life happens, and your ever-changing life circumstances would mean that you will have to revisit your goals and adjust your plans accordingly. Maybe you have to downsize your wedding to put more money towards your home down payment, or you will have to send your child to university locally instead of abroad. Or your assets grow quicker than expected, and you can safely retire a few years early!
Whatever it is, it is important to not be hard on yourself if you have to delay or even change some of your goals. Ultimately, it is about working towards the things that really matter to you in a sustainable and realistic manner.