At this time of year many of us are lucky enough to be able to take time off, relax and take stock of our financial situation. At Milestone we think it is important to not just make financial New Year’s resolutions, but to also take steps to help ensure we achieve those resolutions. We have identified 7 key actions you can take to help ensure success.
1) Set SMART goals. When we set a vague goal like “save more money” or a seemingly insurmountable one like “pay off all debt,” we’ve already set ourselves down the path to failure. Instead, you want your goal to be SMART: specific, measurable, attainable, realistic, and time-sensitive. Instead of “save more money,” a SMART goal might be to “save $5,000 for a Fiji holiday by October 2015.”
2) Determine how you’ll invest for each goal. For goals to be funded within the next 1-2 years, you’ll want to keep your money somewhere safe like a bank account or cash fund that just earns interest and doesn’t fluctuate in value.
For longer term goals, it probably makes sense to take some investment risk. Otherwise, you face the risk of having your purchasing power reduced by inflation. A 1% return with 2% inflation is actually losing 1% a year in real terms of what you can buy with that money.
3) Calculate how much you need to save per month. Work out how quickly you can be debt free by making extra payments towards your highest interest balance and then putting those payments towards the next highest debt once it’s paid off. For other goals you’re saving for, don’t forget that the cost of your goals will likely increase over time due to inflation.
4) Look for tax-advantaged ways to save. For example, PIE fund returns are capped at an income tax rate of 28%.
5) Minimise your investment costs. Look for the lowest cost investment option suitable for your goals, investment time frame and risk tolerance. However, do not select your investment based upon cost alone.
6) Automate your saving. Goals, plans and investments won’t mean anything without actual savings. By automating your savings, you make sure that they take priority vs. saving whatever you have left at the end of the month. You can do this by payroll deduction or automatic transfer from your bank account.
7) Adjust as needed. Once a year, visit your Milestone adviser to revisit your goals, re-run your calculations based on your actual investment returns, see if any laws have changed, and rebalance your portfolio if necessary. If your investments are down in value, this is not a reason to change them but just a natural part of the cyclical nature of investing. Instead, try to see it as an opportunity to purchase more at a lower price through your automatic investing and re-balancing. Unfortunately, no investment consistently outperforms all the time but you’ll maximise your odds by keeping your investment costs as low as possible.
Contact your Milestone adviser for help you with any of these key steps.