When it comes to money, everybody’s objectives are different. By paying close attention to what you need and want from your finances and investments, you’ll have a better chance of getting ahead in your financial life.
It’s important to differentiate between needs and goals. This will help you allocate income to the areas of your finances that require immediate attention, as well as plan and invest for the long-term.
To put both needs and goals into focus, try thinking of your financial life as a pyramid. This will allow you to establish a hierarchy of financial needs, and help you develop a logical, systematic approach to formulating and meeting your goals.
At the base of the pyramid are your foundation needs. They form the foundation because they’re related to financial security. These are everyday items to which you must devote part of your income-including shelter, food, clothing, health care, taxes and other daily living items.
Other necessities that should be considered part of the foundation include insurance and a cash fund for emergencies. Adequate life, disability, critical illness and long-term care insurance are essential to your and your family’s financial health. Proper insurance coverage means you and your family won’t experience financial hardship if you can’t work because of a serious health problem, or if you die.
Higher in the pyramid are lifestyle needs. Once the foundation is in place, you can focus on these longer-term requirements. Lifestyle needs can include paying down the mortgage, saving for your children’s education, retirement savings, money for vacations and travel, buying a second home and even building an estate to leave to your heirs or charity. Whatever your needs, it’s important that they be clearly defined.
Once your needs are established, it’s time to establish goals. You transform needs into goals by assigning specific dollar amounts and time horizons. Once your goals are in place, you can devise a savings and investment strategy for reaching them.
Take retirement, for example. You know you need a comfortable income when you leave the workforce. But you must also know how much money is involved and how much time you require to meet that need.
You must determine the level of annual income you’ll require in retirement, as well as other financial commitments. For example, if you plan to buy a home in the southern United States and retire as a snowbird, you’ll need money to buy the house, as well as regular income for living expenses. When you know how much money is necessary, you must determine how much wealth you’ll have to accumulate. Then you can calculate what you should save and invest every year from now until retirement age, and the level of investment returns you’ll require.
It works the same way for other long-term goals. When are your children going to attend university or college, and how much will it cost? Then you can determine how much to save and invest from now until then.
A financial professional can help you assess your needs and work out your goals. With financial help you can establish a savings and investment plan that will ensure your financial objectives are reached.
Member Canadian Investor Protection Fund
Jodi Nastor, CFP
390 McNabb Street Unit 2