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  • Writer's pictureAsad Reza Nassur

Mastering Financial Goal Planning: Simple Strategies for Success

Disclaimer: I am not a registered financial advisor and this post is for information purposes only.


Creating a basic financial goal plan isn't as challenging as it may seem. Let me stress the "basic" part; delving into the specifics of taxonomy, portfolio optimization, and the like isn't necessary for most people. This guide aims to help you organize your expenses, putting you in a position where you can plan for significant purchases, such as a down payment on a home or saving for college, without running in circles. Best of all, I'll make sure it's both fun and simple.


It all boils down to cash inflow versus cash outflow.


**Cash Inflow:**

Cash inflow includes everything that comes to you from any source and doesn't require repayment. This could be your salary, side hustle income, interest, dividends, allowances from parents, and even that birthday cash from your grandparents. I could go on, but I hope you get the idea. Your goal should be to increase this amount as much as possible.


**Cash Outflow:**

Nobody enjoys parting with their money, but in life, there's always a give and take. Cash outflows represent your expenses or places where you spend money. The primary items in this category include rent, tuition, utilities, groceries, transportation costs, vacations, dining out, gifts for family and friends, and shopping. Most people tend to overlook the last two items, but non-essential shopping and socializing come at a cost. Your aim should be to reduce these expenses reasonably (frugality is a good thing, but not to an extreme).


**Cash Inflow - Cash Outflow = Free Cash Flow or Savings**


I mentioned interest and dividend income in the cash inflow section. These are the fruits of investing your savings, and over time, this can be very satisfying. Think of it as nurturing a child (the one you want) who grows into something amazing over time, without the potential disappointments (if invested wisely).


You might have noticed I didn't consider investments as a cash outflow, as it's a bit murky. Investments are more like a transformation of your cash flows. For instance, if you invest in a fixed deposit (not my favorite), when it matures, you receive the principal and interest. So, effectively, your cash flow is just the interest. Treating the principal amount as a cash outflow at maturity would artificially inflate your numbers and cause unnecessary confusion. As this guide is meant for everyone, I wanted to clarify this point without delving too deep into investment intricacies.


Now that we've covered the definitions, let's explore what you can do to achieve your goals. I suggest focusing on one major goal and one minor goal at most. A major goal could be a down payment on a house, saving for a master's degree, or a significant home renovation. A minor goal might be short-term, like a year-end vacation. Personally, I'd recommend allocating a higher percentage of your monthly cash flow to major goals, such as 80-20 or 70-30, but not exceeding 50-50.


Before you dive into your goal, there are a few things to set up: an emergency fund, health insurance, and life insurance. I call these my three pillars of sanity, as they remove a significant chunk of uncertainty from your life. An emergency fund should cover 6-12 months of your minimum expenses, providing you with peace of mind and the flexibility to take calculated risks, like pursuing a career change without financial worries. Health and life insurance safeguard you against unexpected health-related expenses.


Handling the emergency fund might seem daunting, but I like to break it down: target 3 months initially, then split 4-6 months between your goal and the fund, and for 7-12 months, you can allocate more to your goal. Uncertainty is a factor, but sticking to the plan is crucial.


Now, let's talk about the "goal." For example, let's consider a home down payment, a common long-term goal. Assuming you have your 3-month emergency fund ready and your health and life insurance are set up:


When aiming for a medium-term goal (less than 5 years), like the initial down payment for a home, consider cutting back on "non-essential" expenses to reach your goal faster. This might mean postponing a luxurious vacation or delaying a luxury purchase like a second car. My focus is on optimization rather than suggesting you find a better-paying job, which may not always be within your control.


Imagine your down payment is $100, and at the end of the month, you have $10 left. Since you've already reached your 3-month emergency fund goal of $60, put $5 toward your emergency fund and the remaining $5 toward your down payment. Simple math suggests it would take 20 months to reach your down payment goal. Alternatively, if your job security is strong, you can delay building your emergency fund beyond 3 months and focus on filling your down payment fund. However, be prepared for changes, especially if your home loan EMI surpasses your current rent. You might need to top up your emergency fund.


This process is both an art and science, as life is unpredictable. You'll also experience salary increments. Consider directing the excess income toward your long-term goals or split it between long-term goals and discretionary spending. The power is in your hands.


I hope this guide helps you make more informed decisions about spending and resource management. As always, have a great day!


P.S. ChatGPT has been my editor in chief once again.

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