Financial Fundamentals (Pt. 4) - Goal Setting
We’ve already discussed the structure of saving - how to set yourself up to be able to save on a monthly basis, but we haven’t really discussed why this is a good idea. We often get bogged down in the quantitative details, how much contribution room do you have, what percentage should be in equities versus fixed income, etc. However, a central component to any financial plan is - what do you want your money to do for you? While for some, saving is a goal in and of itself, most of us don’t necessarily want to channel our inner Smaug and guard our treasure just for the sake of having it. We want to have enough to be able to accomplish what we want in life, which is where determining our goals comes in.
I know we’ve all seen discussions around goal setting in school or at work, and there is a reason for it. Having a set idea of what we are saving for makes it more likely we will stick to our plan and not overspend, and gives us a clear idea of where we are relative to where we would like to be. I tend to liken it to a road map, if you don’t know whether you want to wind up in Nevada or Berlin, how do you know if you are heading in the right direction? Some of the more long term goals may be a little fuzzier - you may not know exactly what you want your retirement to look like just yet, but having a general idea will help get you on the right continent. As you get closer to the date you will start to firm up the final destination you want to reach.
Goals take many forms - short, medium or long term, as well as those that are necessary versus those that are aspirational. While this is hardly an inclusive list, hopefully having a few options listed in each bucket will help give you something to consider when planning for your own future.
Short Term Goals
These are typically things you are going to want to accomplish in the next year or two, and are usually more towards the “necessary” side of planning rather than aspirational in nature - it takes time to work up to those big dreams! Some examples include:
Paying off all high cost debt (already covered here)
Setting up an ongoing budget for you and your family (already covered here)
Building up an emergency fund. If you have nothing at all, start small - $500 or $1,000. Ultimately, this is your “something’s gone wrong and I need cash now” fund so what amount makes sense for you will vary, but you’ll want to set something aside for if your car breaks down / furnace
needs replacing, etc. at the very least. Traditionally, people would suggest putting 3-6 months expenses aside as a target emergency fund. The amount that makes sense for you will depend on a number of factors, such as if you and your partner can live on one of your incomes, whether you are each in stable jobs and industries, and whether you have dependents. Save what you can until you reach a level where you feel comfortable that you can weather some income disruption (most of us probably have a much clearer idea of what the right level is after the Covid disruptions).
Medium Term Goals
While some of these are still practical, you can start to get into your wants and away from strictly your needs. We would usually be looking at the next 3-10 years here, but really it’s a catch all for anything not immediate and not well into the future. Some items would include:
Paying off student loans and other “helpful” debts (more details here)
Protecting your downside with insurance (there will be more discussion to come about the pros and cons of different types of life insurance, and where living benefits fit in to your plan). Part of this will be reviewing your employer plan to see what gaps remain that you will want to protect.
Saving a down payment for a home - there’s a lot to consider here! What is the price range you are looking in? How much are you able to use for a down payment? Are you eligible for first time home buyers tax credit? Will you be using the Home Buyers Plan / First Time Home Buyers Savings Account or outside savings? Should you open a First Time Home Buyers Saving Account?
Saving for a vacation or rental property - if you already own your home maybe you want to plan for a place in Arizona? Or on the water in Vancouver Island? While this can be purely for recreation or investment, many people also start to look to where they plan to retire and use their second property to become their retirement residence.
Putting funds aside for your kids education. While saving into an RESP is a good start, getting an idea of how much of your children’s education you plan to fund, what sort of programs (and associated tuition) they are looking at, and will you be providing support outside of education expenses, such as rent free living (or covering room & board if they are studying away from home).
Long Term Goals
The younger you are, the harder it can be to imagine what these will look like, and when it will be relevant. However, I can say with certainty that I’ve never spoken to someone who is 10 years out from retirement that thinks they started planning too early! While certainly not exhaustive, these can include things like:
Retirement. When do you want to retire? What kind of lifestyle do you want? Obviously when planning 30+ years down the line it’s tough to visualize. A good starting question is, “if someone offered me a salary to stay home and never work again, how much would they have to offer for me to take it”? Once you know what sort of income you will need, and for roughly how long it becomes an exercise in budgeting - what sources of
income will you have (government and employer pensions) and how much will need to come from your investments?
Paying off your mortgage. While some people like having access to the cash in their homes, many people like the security of having their home paid off. Some may consider this medium term and aggressively pay down their mortgages, but most use a good portion of their 20-30 year amortization to pay off their homes.
Leaving a legacy. This can be anything from estate planning to maximize assets to your children, leaving a large charitable donation on your death, or setting up a foundation while living. It’s difficult to list examples of this as there are a myriad of options, but if there is something that’s important to you and your family, you can start planning to make an impact in this area.
In addition to goal setting making you more likely to stay on track with your spending habits, having clearly defined goals will help you and your Financial Advisor (don’t have one? Reach out here for a risk-free introductory chat) select the most appropriate accounts to save in based on the timeline and flexibility of your goals. As well, they will be able to find a balance between your risk capacity and tolerance and the growth needed to reach your goals. We will dive further into which accounts make sense for which goals next time.
Elyce Harris is a CFA Charterholder working with Cornerstone Investment Counsel, a registered ICPM in Alberta, Canada. She is also a licensed insurance broker in Alberta, Ontario, and PEI. While every effort is made to ensure the accuracy of statements, errors may occur. If a specific stat or carrier policy is cited, a source will be provided, however some opinions / generalizations have been provided without a specific source.