Money drives many decisions that we make day to day. Setting goals can help us take control and feel more confident about those decisions. Financial goals are the most important objectives you set for how you will save and spend money. They can be things you hope to achieve in the short term or long term.
- Short-term financial goals – These are smaller financial targets that can be reached within a year. This includes things like a new television, computer, or family vacation.
- Mid-term financial goals – Typically, mid-term goals take about five years to achieve. A little more expensive than an everyday goal, they are still achievable with discipline and hard work. Paying off a credit card balance, a loan, or saving for a down payment on a car are all mid-term goals.
- Long-term financial goals – This type of goal usually takes much more than 5 years to achieve. Some examples of long-term goals are saving for a college education, retirement, or a new home.
The time value of money (TVM) is the concept that the money you have in your pocket today is worth more than the same amount would be if you received it in the future. Understanding the time value of money can help you in making decisions ranging from which job has better salary terms, what’s a good rate for a loan, or if the investment you’re considering has good growth potential.
- The time value of money means that a sum of money is worth more now than the same sum of money in the future.
- The principle of the time value of money means that it grows only through investing so a delayed investment is a lost opportunity.
- The formula for computing the time value of money considers the amount of money, its future value, the amount it can earn and the time frame.
- For saving accounts, the number of compounding periods is an important determinant as well.
- Inflation has a negative impact on the time value of money because your purchasing power decreases as price rise.
Steps in Financial Planning
Step 1 – Defining and agreeing your financial objectives and goals
The goals and objectives will be the guide to the financial plan and should provide a roadmap for your financial future. They should contain the following features:
- Quantifiable and achievable
- Clear and have a defined timeframe
- Separate your needs from your wants
They should be agreed and documented with your financial adviser to assist you to measure progress. They should also be reviewed periodically to capture changing circumstances and to ensure they remain relevant.
Step 2 – Gathering your financial and personal information
The financial planning process and its success will depend on the quality and clarity of the information communicated to your adviser. Your adviser will complete a detailed financial fact find to capture all relevant information in relation to your finances. This will include:
- Income and expenditure
- Assets and liabilities
- Risk attitude, tolerance and capacity.
Step 3 – Analysing your financial and information
Your financial adviser reviews the information provided in step 2 and uses it to produce a report that reflects your current financial profile. The following ratios are produced to improve your understanding of your financial circumstances and to pinpoint areas of strength or weakness:
- Solvency Ratio
- Savings Ratio
- Liquidity Ratio
- Debt Service Ratio.
Your attitude, tolerance and capacity for risk are assessed using a psychometrically designed risk tolerance questionnaire in relation to investment assets. This is also analysed to assess your asset allocation for investment or pension goals.
Step 4 – Development and presentation of the financial plan
The financial plan is developed based on the information received in step 2 and analysis completed in step 3. Each of the goals and objectives in step 1 should be addressed and a recommendation for each identified. It will include:
- Net worth statement (a balance sheet)
- Annual consolidated tax calculation Step
- Annual cash flow report (displaying surplus or deficit)
Step 5 — Implementation and review of the financial plan
Once the analysis and development of the plan is complete, the adviser will outline the recommended courses of action. This can involve implementing:
- A new pension or investment strategy
- Changing debt provider
- Additional life or serious illness insurance
- Income and expenditure adjustments