Hello again,
For step #3, I mentioned the importance of setting up short and long term goals. This one is hard to talk in detail about, as everyone's goals will be quite different, depending on your lifestyle, financial situation, stage of life etc. I will touch on a few, and try to give some tips, that I have learnt over the years.
Why set up goals:
Setting goals allows you to think about your future, and what you want to achieve. To set them, is one thing, the next part is to have the motivation and ability to achieve them. Setting up a long term goal is usually based on what you want to do in life, and short term goals are set up, to help you achieve your long term goals.
My feelings on setting goals:
I feel that setting goals if very important. In most instances, when I had a client in my office, and asked them about their long term goals, they had no idea. Most would come in, tell me what they were there for (usually a short term need) and they didn't care about or want to talk about anything else.
For example, I would have clients come in asking to buy a car. Instead of just doing the car loan, I would ask about their overall debt situation, not just the car loan. In some instances, my clients would have a large amount of other debt, however when I asked about their goal to pay off their debt, they had no idea how to pay it off, or when it would be paid off. I also had many clients whom would come in to acquire new debt as soon as their other debt was paid off, or would come in to apply for more debt because they couldn't afford something they wanted. In many instances, it is fine to apply for debt, but I recommend having a short term/long term goal to have it paid off. Short term may be a 3-5 year vehicle loan, medium term may be a 10 year repayment of a large school loan, long term may be a new mortgage.
Some examples of short term goals are:
1) Buy a vehicle in 1-3 years
Well if this is your plan, then why not doing research on the cost now and start saving now. Many people go to the bank to finance all or most of their vehicle purchases. This means a longer time to pay it off, a large monthly payment that will effect their current budget, and/or higher interest costs. However, if you know now, that you will need a new vehicle in a few years, then why not set up a vehicle account and put money into it each month. This will save you money in the long run. If you have to finance it all, and have a payment of $500/month, for example, you may not be able to afford the $400/month towards your retirement goal (to be discussed later), therefore not planning for your short term needs will have an effect on your long term desires.
2) Go on a trip
Try to figure out your family travel plans for the next 1-2 years, see how much they would cost and set up an account to save money. This way, you can afford to pay for most or all of it, with cash. Sometimes, what I do, is set my trip around a time that I know I will have a lump sum of money come in. I.E. when I am expecting a bonus from work, when I am expecting a tax return, or because I am paid bi-weekly I plan it around a month where I will have 3 paycheques.
Some examples of long term goals are:
1) Paying off your home
I put this as a long term goal, as for most people, it will take 20-30+ years to pay off a mortgage. Even if you just bought your home, or have several years left, look at the calculations NOW. You may notice, by adding an extra payment of $200/month will pay off the mortgage SEVERAL years sooner, and will save you a large amount of interest. I always try to have my clients DEBT free, for when they retire. So if you have a goal to retire at 60 (for example), and your mortgage won't be paid off until 65, then maybe look at a payment that will have it paid off by 60, and see if you can manage that payment now. You can add it as a double up payment, and depending on the bank, should be able to stop this double up payment if something comes up in the future, and you can't afford it anymore. If you look at this early, the extra payment may be small, however if you look at this at age 58, the payment required may be huge. If you still have a large mortgage when you are close to your retirement age, it may mean you have to work longer, or may not be able to enjoy all the things you want to in retire. Plan EARLY, so you enjoy your retirement goals, whatever they may be.
2) Retire
I put this as long term, as I am 34 and have several years to retirement. Obviously, others are closer to retirement, so this may be a short term goal for them.
Look at calculations to see, how much you NEED during retirement. Then figure out from there, how much you need to save now, in order to have that amount when you retire. This planning really takes some time, as you need to sit down and look at several things a) what your lifestyle will look like b) what sort of monthly expenses will you have (i.e. will your mortgage be paid or not, do you want to travel, etc). c) What other income sources will you have, this is just a few things to look at.
I will touch a bit on point (C), what other income sources will you have. For everyone this is different. The main two things most people look at, are CPP and OAS. However, it is hard to determine exactly what CPP and OAS will look like, years from now. As of now, the maximum is around $1500/month (depending on many factors), and this IS taxable. For most people $1500 minus taxes is not enough. Another source of income may be your work pension, however some people work for companies that don't even have a pension. If you do work for a company, with a large pensions, great, but seldom have I seen someone getting a large amount of company pension. I am not saying it doesn't happen, but most company pensions are not huge. The amount you get depends on the company you work for, what type of pension plan you opt for (defined benefit or defined contribution), how many years your with the company for, what age you retire at, and more. It is good to look at what you company pension income may be when you retire. Look at this EARLY.
For most people, they will need to supplement their pensions with other income. This may be working longer, selling assets or investing NOW for your future retirement. There are several investment plans that can help with long term retirement, and I suggest talking to someone, to see which plan, is best for you. The main point I make, is to start early and contribute regularly. Another point here, is that a government pension is taxable, a company pension is taxable and RRSP's are taxable. That said, if you have a good size pension already, you may want to look at sources other than RRSP, so that not all your sources of income are taxable. For example, when you take money out of a tax free savings account, it is not taxable. So it may be a good way to supplement your income in retirement, if you're going to have a large amount of taxable income already. Tax Free Savings accounts and RRSP's do have different tax consequence, so it's important for you to look at both and decide which one is best for you.
In the above, I only touched on a few examples, but my main point is to plan now. Even if you have a goal that is 20-30 years from now, don't procrastinate. If you do, it may mean you will have to wait even longer to achiever your goal, or may have to adjust your goal even if you don't want to.
All the best with your planning :))))))))))))))
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