Understanding your Financial Goals

Navigating your financial future starts with asking yourself some crucial questions to understand what you hope to achieve and how you plan to get there. These questions form the cornerstone of a financial plan tailored specifically to you, reflecting your unique circumstances, risk tolerance, and aspirations.

1.   What do you want to achieve?

The first step is some deep thinking about what’s really important to you. Do you want enough money to not work? Enough to go on an extra holiday per year? Or are your goals much higher? All of this is hugely personal, there’s no right or wrong answer. Many people live very happy lives on relatively modest incomes, others have huge targets and strive hard to reach them. The key is understanding what you and your family really want, and in what time frame you want to achieve those goals. Sit down and spend some time formulating a goal and a target. Once you have that in mind, you can begin to think about what steps are needed to get there.

2.   How much can you save?

What is a sustainable amount that you can save consistently each month? This figure varies widely among individuals and is influenced by numerous factors, including income, expenses, and personal goals. The key is consistency and realism in your saving efforts. You want to strike a balance between saving enough to actually make a difference, but not so much that it really impacts your life.

A good suggestion is to save an amount that is ‘mildly’ uncomfortable, ie it makes you think hard about spending additional money, but it’s not so much you’re making significant cutbacks. Remember, the more you can save the faster you’ll get to your goals.

3. Assessing your risk tolerance

While we’re referring to ‘savings’, we’re really talking about investing. Because to be able to hit your financial targets you’re going to need to be investing that money you’ve parked.

So the key question is: how much risk are you willing to take when investing these savings? Your comfort level with risk impacts your investment choices and the potential return on those investments. Understanding your risk tolerance is essential for building a portfolio that you're comfortable with.

When considering how to invest, it’s important to look at historical return variability of various asset classes. While past performance is not indicative of future results, it can provide a guideline. Stocks, bonds, real estate, and other assets have different risk profiles and return potentials. Diversifying your investments can help manage risk and increase the likelihood of achieving your desired income level.

Financial Planning and Investment Choices

Once you have a clear understanding of your goals, the next step is to consider how to achieve them. This often involves generating passive income through investments. While property is often a popular choice, it's important to note that managing rental properties is likely far from passive unless you employ a property manager, which will impact your returns.

For those targeting truly passive income, a diversified investment portfolio typically offers a more hands-off approach. As an example, let’s assume a 5% annual return on your investments. To achieve a passive income of $50,000 per year, you would need to amass a portfolio of $1 million. For a higher income, say $200,000, a portfolio of $4 million would be required. These figures are simplified for illustration; your actual needs may vary based on the returns you can achieve, which depend on the assets you select and the timing of your investments.

See the below chart, credit to visualcapitalist.com.

Financial Literacy: The Foundation of Success

Understanding basic financial principles and investment options is crucial for anyone looking to secure their financial future. Knowledge is power, especially when it comes to investing. There are numerous free resources available on this website to help you learn more about personal finance and investment strategies. Click here to learn more about Investing, or Click here to view our range of Courses available.

Remember, there’s no one-size-fits-all answer to financial planning. It’s about understanding your desires, making informed decisions, and adjusting as necessary to navigate the path to your financial targets. With the right approach, you can create a plan that enables you to achieve both your financial goals and life aspirations.