Smart Financial Goals

Pete McKavanagh shares his insights on setting the right goals for your individual financial needs.

‘I wanted to share a situation that a new client presented to me because there are some simple universal takeaways from it.

We’ll call him Dave. So Dave came to me with a specific monetary financial goal which is actually quite unusual most people just have a more vague goal ‘save tax’ or ‘earn a return on savings’.  So it was refreshing to see this specific goal, anyway, he told me his goal was to have €60,000 in the bank in five years and €120,000 in the bank in 10 years this wasn’t linked to anything like a house purchase or education fund just monetary goals.

Having financial goals can be very powerful because achieving them can give you options you otherwise would not have, so in one way he was on the right track but in a few other ways the goal didn’t make sense. When I looked at his finances he had a 30,000 euro car loan at 7% APR and no pension provision so by allocating all his spare cash to pursuing the goal of 60,000 in the bank he was unwittingly making some common financial mistakes:

Firstly I had to remind him how you get money into the bank IE it goes from your company (he was a contractor working as a limited company)  then to the tax man for his portion, and then on into the bank account.  Once it’s it’s there in the bank it’s safe, at least in the short term but as it earns no interest it’s not safe in the long term due to the effect of inflation.

So, his goal was good for the taxman and it was good for his bank manager who was (indirectly) lending him back the money he was saving at a 7% interest rate. But was it right the right goal for him?  Well, it’s not my role to tell people their goals are ‘wrong’ of course because there are life circumstances or psychological reasons a client may pursue a particular financial goal. However, it is my role to ensure that they understand fully the context of that goal and what other options are being given up to achieve it.

So we dug a bit deeper into the goal and Dave really wanted two things,

1. To have a sense of control over his money not just having it come in and go out unchecked
2. He wanted to feel comfortable or wealthy as a reward for his hard work.

I explained that if he wanted to stick with this type of goal and felt motivated by it then he should reconsider the outcome and rather than aiming for 60,000 in the bank in 5 years he should aim for a net worth of 60,000.  In other words, assets minus loans equal 60,000.

He was saving 1,000 per month in the bank so to illustrate the point I suggested he put 1,000 into a company pension and with the 520 tax/USC/PRSI saving on the pension he would overpay his loan.  So every month instead of getting 1,000 in the bank he would get 1,000 into his pension and reduce his loan by an additional 520.  In basic terms, five years hence his net worth would be approx. 31,000 better off due to the tax relief on pension and about 3,000 better off from the interest saved.

When I ran the projections and presented the numbers the client had a change of focus and agreed that net worth was a better definition of what he actually wanted.

We did a bespoke financial plan for him which he could visualize using our Voyant reporting software and importantly for him to review progress each year as circumstances changed.

So financial goals are great, just make sure you have all the necessary information when setting them to ensure that you are going about them in the right way.’

If you’re ready to set your financial goals, arrange a consultation with one of our Rockwell experts here.

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