SETTING FINANCIAL GOALS
The end of the calendar year creates a great opportunity for reflection. It is a great time to look back at events of the past year and assess what lessons one has learnt. It also allows for forward thinking and setting of goals. Many people make resolutions which they set to achieve. For us there is a financial resolution that we think should be made each year – Those individuals who earn income through employment should aim to end each calendar year wealthier than they began the year. In this month’s Financial View, we look at some of the simple concepts behind achieving this.
Growing your wealth whilst you are employed and earning a salary is very important and, whilst the theory is very simple, it can be pretty complicated to achieve. Its importance cannot be understated because you will get to a stage where you are no longer able to earn income, whether as a result of retirement, or as a result of illness, and you are left to survive on the capital that you had managed to accumulate to that date. If you have a high asset base relative to your income needs, you should be able to comfortably maintain your standard of living. If you have a very small pot of assets, then life could be very uncomfortable or difficult as you are forced to drop your standard of living.
So, what should one be hoping to achieve in 2023? Having more money in your bank account may seem to be the easiest measure but probably not the best target. Rather the aim should be to have less debt, to have more in your retirement pot, and have a greater buffer against life’s unforeseen events by having more investments.
The easiest way to increase your wealth is to ensure that you spend less than you earn, and then invest those savings in appropriate investments, taking sufficient risk so that your savings grow themselves – in other words getting your money to work for itself. If done over a long enough period of time you will enjoy the benefit of compound interest which will mean that your investment returns and growth of your investments will dwarf the initial capital that you invested. To be really successful at this one actually needs to prioritise saving. Warren Buffett, who is often said to be the world’ best investor in history, famously said, “Do not save what is left after spending; instead spend what is left after saving.”
You should aim to allocate as a minimum of 10% to of your gross income to your retirement savings each month, this would be a good start to ending the next year with more than you started with. The years go by quickly and within a blink of your eye you will have reached retirement age, so set a goal to start tomorrow. As they say just do it, as once in place you will not even notice the contributions.
The next calendar year is a series of 12 months. At each month end perform a quick calculation on your wealth. Add up all your assets and then deduct any debt that you may have. Granted there can be volatility in investment values but if that resulting value is not increasing each year, then one needs to at least understand why.
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