Plan for the Future
Whilst there are many opinions on the key to developing good financial health, I believe one of the key factors necessary is to develop a plan. When we are at work, our tasks are the outcome of business plans which are developed to achieve business goals. To attain our personal finance goals, we should consider a similar, though less complex process.
What are your current savings?
As we have already calculated our net worth, we should have a figure for our current savings. How much you should hold in cash depends on your situation, though we should start with an emergency fund. Essentially, this is cash that we can access quickly due to an unforeseen event, like a car or major appliance breakdown. This way you can pay for the emergency without going into debt.
If you have no savings, then target a minimum of $500 to start. If you are more advanced, then three months' living expenses is a good goal.
Short and mid-term financial goals
Financial goals can be divided into three categories:
- Short-term goals take under one year to achieve. Examples may include taking a vacation, buying a new refrigerator of paying off a specific debt.
- Mid-term goals can’t be achieved straight away, but shouldn’t take too many years to accomplish. Examples include buying a car, finishing a degree or paying off larger debts.
- Long-term goals typically take over 5 years, require longer commitments and often more money. Examples include buying a home, savings for a child’s education.
- By initially setting and achieving short- term financial goals, confidence is built and momentum gained. Just like your spending, frequently reviewing to ensure you are still on track is critical to success. As in life things happen, so we always need to stop, review and adjust if required.
How much will I need in retirement?
This will ultimately depend on the type of lifestyle you would like in retirement with a good start starting with the following factors:
- How many years do you think you will be retired
- Are you a single or a couple
- How much will you spend to live comfortably
- What assets or income do you have, including your own home
- Will you be eligible for the age pension
- Do you plan to help your children or family members
Taking these factors into consideration, use a retirement calculator to determine if you are on track, and if not, develop a plan to close the gap. Starting early is always the key.