The challenges of balancing different goal time frames
When you think about financial and lifestyle goals, there are probably several, each with a different timeframe. Juggling them and weighing up your priorities can be challenging. Should you focus on paying off your mortgage quickly now, or saving into a pension for retirement that’s still many years away?
With conflicting goals, it can be difficult to have confidence in your finances and long-term financial stability. When you start thinking about goals, it’s likely there’s several with different time scales, and it can be tempting to focus on those that are closer at the expense of the long term. For instance, someone in their 40s may have goals that include:
- Building up a financial safety net
- Paying school fees or supporting children through university
- Paying off the mortgage
- Using investments and savings to go travelling in ten years’ time
- Contributing enough to a pension that it’s possible to retire at 65
So, how do you balance these?
Owning your home can mean a greater sense of security, lower monthly repayments and an asset to pass on to loved ones when you die. As a result, you may consider cutting pension contributions to make overpayments. However, pensions often benefit from tax relief and employer contributions, effectively giving you free money. Add in potential investment returns, compound growth and the annual allowance, which limits contributions you’ll receive tax relief on, and you could find yourself worse off in the long term.
But, with so many influential factors, understanding which goals to focus your attention on and how to split up your assets or income can be challenging.
The first thing to do here is to define what your goals are and when you want to achieve them. We often think about the immediate future when saving; perhaps you’re looking forward to a family holiday or your child will be heading to university in September. But the medium and long-term goals are just as crucial and shouldn’t be overlooked in favour of the short term.
Understanding the impact of your decisions
One of the key challenges of balancing different goals is understanding the long-term impact different decisions will have. This is where effective financial planning can help. One tool we use in particular, cashflow planning, can give you a visual representation of your wealth.
By inputting details about your current wealth and projected income, cashflow modelling can give you an idea of how your wealth will change over time based on your current lifestyle. However, it offers greater value than this. You can use the tool to show how your wealth will change based on decisions, giving you the information needed to base them on.
For example, you may be thinking about voluntarily increasing pension contributions but would the short-term sacrifice in disposable income be worth it? Or would you be better off directing that spare money to savings, investment or reducing mortgage debt? Often, there’s no clear right or wrong answer, but cashflow modelling can help you understand how a choice will affect medium and long-term goals that you may have.
Combined with a financial plan that focuses on your goals, cashflow planning can give you real confidence in the progress you’re making. You’ll know that you have a blueprint in places that takes into account all your different aspirations, from those that are just around the corner to the ones that are still a few decades away.
One key thing to remember is that cashflow planning is restricted by the data that’s input. As a result, you need to regularly update the information, reflecting both positive and negative changes. This allows you to respond effectively to these changes and make adjustments where necessary. For instance, an unexpected salary increase may mean you may be able to retire two years earlier than anticipated if you choose to. On the other hand, poorly performing investments could mean it’s wise to delay your plan, allowing time for the markets to recover.
When it comes to financial planning, we’re here to provide you with support. Using a range of tools and techniques, we’ll help you see how the decisions you make now will have an impact in the near, medium and long term.