We’re all used to thinking about what changes we want to make in our lives, particular as a new year dawns. Whilst January is a great time to set life goals, financial goals tend to be better aligned to the financial year.
We all have to complete tax returns for the financial year ending 30 June each year where we have to accurately record our income for the year, so what better time than to July to set our financial goals for the new financial year.
Of course whilst our income is certainly an important measure, what really matters is our after tax income, how much of this we have been able to save or invest in income producing and/or capital growth assets. The best measure of this is what I like to call our personal balance sheet.
When you apply for say a home loan, the bank assesses both the equity you will have in the home (the value of the property compared to the amount of the loan needed to buy the property) and just as importantly your ability to service the debt; how much free cash flow you will have to make your loan repayments.Just like a company that prepares a balance sheet that details its assets, liabilities and its net equity or net worth, we have to think in the same way as individuals. What are our personal assets and against that our liabilities such as home/investment loans and perhaps credit card debt.
When thinking about financial goals it is this concept of free cash flow which is important.
Here are some of my specific tips about financial goal setting.
1. Just do it
The most important message is just do it. It’s often less about the goal itself and more about what you will learn through the mere process of goal setting that is most valuable
2. Goals are ok, but action plans matter
It might seem obvious, but goals in themselves are meaningless unless there are action plans to achieve them. What they are will depend on the goal and your circumstances. Maybe it’s saving an extra amount per week for a home deposit or increasing you mortgage or credit card repayments to reduce your debt. Whatever it is make is measurable and monitor your progress
3. Stretch goals
Financial goal setting can be hard to know where to draw the mark. Set goals that will stretch you but are still achievable. Too easy and you won’t have maximised your potential and too hard and inevitable disappointment will result.
4. Short term goals
NASA didn’t get to the moon by just its overall goal, as audacious as it was at the time. It was a series of short term goals that could be measured and tracked that ultimately got the job done.
The same applies to us as individuals. We might have a goal for the year but we must have much shorter term goals, no longer than 90 days, that will inspire us and help us to keep on track for the full year.
5. Long term plan
A financial goal for the year is absolutely the right thing to do, but it must be set in the context of a long term financial plan. There’s no point having goals for the year that are not aligned to your longer term plan. If you don’t have one, seek assistance from a licensed financial planner.
6. Alignment with your personal partner
Just like all aspects of your personal relationships, if you have a significant other, you need to talk through your collective aspirations. Many a yearly plan has failed when a couple’s goals and financial disciplines are not aligned.
7. Pressure test your goals
Any plan needs to be “pressure tested” with a few possible “what ifs”. What if say interest rates on our mortgage go up or down – what affect will that have on our financial goals.
8. Cash flow is king
There’s no doubt in the current climate more than every your ability to save and/or generate cash will help you ride out any financial road bumps that might occur along the way. For the first time in some time, job security for some is becoming more tenuous and whilst you can’t always buffer against this completely, reducing non income producing debt and keeping strong positive cash flow will keep you in the best position possible.
For professional assistance visit www.bellpartners.com
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