Most people have a number of different but competing financial goals. They may include buying a new car, saving for a dream holiday, buying a house, saving to get married, planning for retirement, or putting their children through college – and sometimes all of them. And trying to achieve them all at the same time presents a major challenge for most of us.
One solution is goals-based planning which sorts the objectives into short-, medium- and long-term categories. “Not all money is equal,” explains Davy private clients director Richard Kinsella. “You can have different risk profiles for different pools of money. An education fund might have a five- to 10-year time horizon while a retirement fund might be 25 years. Twenty-five-year money might be invested in a different way to 15-year money. Different pools of money can be treated in different ways.”
Goals-based planning is a logical process, according to Investec investment manager Dan Moroney. "Some of this stuff is really obvious," he says. "It's about taking logical steps to create a coherent plan. You look at your short-, medium-, and long-term needs and goals. It's incredibly worthwhile to take the time to do this or even spend money on engaging a financial advisor to do it for you."
Short-term goals are usually the car, the holiday, or the house deposit. Medium-term goals can include college funds, savings for a career break, or even for a holiday home abroad. The main long-term objective is usually a retirement fund.
“There is a difficulty in relation to short-term goals at the moment,” Moroney adds. “With interest rates the way they are, anything with a return also has volatility so you really have to keep the savings in cash. This is irreplaceable capital so you can’t afford to take on volatility. College funds might be 15 years off and retirement might be 30. With those funds, you should actively but responsibly seek out volatility.”
While volatility can mean that the value of an investment goes up, it can also mean it goes in the opposite direction. “You have to assess your own attitude to volatility. If you are going to get very worried when the inevitable downturn comes, it’s not for you.”
Kinsella advises people to put a good deal of thought into their goals and how they are going to meet them. “There are a whole series of options and challenges to be considered. There are things that you can’t control, things that you can control, and things that matter to you. We try to have plain English conversations with clients about these things. It’s about what is important to them in their lives. For most people it’s their career, enjoying life, quality of retirement, a new house, looking after their family now and in the future, maybe even succession issues. You also have to consider what will happen if the wheels come off. What happens if you get ill or pass away? They are the goals and objectives and issues that people face.”
Once the goals are identified they should be ranked and prioritised in order of importance. After that it’s a question of deciding how to use the income they have available now to achieve them. “It does come down to choices,” says Kinsella. “You can have a fantastic life now but no one wants to retire with no pension. Small incremental changes now can make a huge difference in 20 years’ time. One of the main things about a financial plan is that it is not static. You have to understand that goal-based plans have to be malleable and adaptable. With the best will in the world you can’t control the investment markets.”