Saving for Long Term Financial Goals

Saving for Long Term Financial Goals

Saving for long term financial goals can seem huge and intimidating, the sheer amount of money you may need to purchase a home or plan for retirement can seem overwhelming.  That overwhelm can lead to inaction because of decision paralysis. 

If you are working on hitting your short and medium term financial goals right now, this article here has some tips on how to organize yourself to reach those goals! 

Today\’s article discusses how to plan to reach your long term financial goals.  Let\’s follow along with fictional example.

Andrea, a Manager in her mid 30\’s with 50k in savings, has a goal of retiring in 15 years with a portfolio of 1 million dollars. This is Andrea\’s dream, but she hasn\’t run her numbers yet to figure out if this is a feasible plan. That is what we will do together today.

How To Calculate How Much You Need to Save For Long Term Financial Goals.

When thinking about short-term savings goals, using  sinking funds in high-interest savings accounts is a good choice to help reach those financial goals. This is where things diverge from short-term financial goal planning. For long-term financial goals, because time is on our side, investing is an ideal method. Investing gives a chance to make a much larger return on investment and requires much less in terms of actual cash contributions compared to traditional savings methods because of investment gains. 

Andrea will use an online investment calculator to determine how much she needs to regularly invest based on her starting point, investment horizon (how long until you need the money), and goals.

She is going to use one of my favourite investment calculators from GetSmarterAboutMoney.ca

Andrea will plug in a few items to calculate her investment numbers.  Here\’s what she\’ll need:

1. Initial investment amount
2. Regular addition of $ and Frequency of contributions
3. Expected interest rate
4. Time horizon (years or months)
5. Years for your money to grow (eg. years to goal date)

Andrea\’s Long-Term Financial Goals:

She wants to retire early in 15 years, which she believes will require an investment portfolio of  $1 million. Whether or not that\’s the amount she will actually need would be based on her discussions with a financial planner, who would help her calculate her projected post-retirement annual expenses and come up with a number that is right for her. 

Let\’s walk through how to calculate her needs using the above information. 

1. Initial Investment (Andrea has already saved up and is ready to invest her $50,000 savings)
2. Regular Addition of $ and Frequency (She has a good job, no debt and can make $1000 monthly contributions to invest).
3. Interest rate: Enter a rate of 7%  (7-10%  is the general average stock market return)
4. Compounding frequency: Annually
5. Years for your money to grow (e.g. years to goal date). In this case, we use 15. 
6. Press Calculate

Unfortunately, Andrea\’s investment balance with this plan is just over half of what she expects she will need.  So, what can she do?

If Long-Term Financial Goals Can\’t Be Met In Your Timeline?

As you can see, Andrea\’s current plan does not allow her to reach her goal in the allotted time. 

So that means that one or more plan elements need to be tweaked. Either the monthly investment needs to be increased if the timeline is maintained, or the timeline needs to be extended to more than 15 years. 

Option 1: Increase the monthly investment

By increasing the investment amount, we find that to reach the goal in 15 years, a monthly contribution of $2780 is required, which is much more than Andrea can afford now. 

What if you don\’t have enough money to invest each month to reach that goal?

Can you reduce costs elsewhere to free up more money in your budget? Can you increase your income to find additional cash to make more room in the budget?

In addition, as Andrea brings in more income with a raise or a new job, she can continue to increase her contributions over time, which will shorten the timeline. She may also start a side hustle to bring in more monthly money to add to her contributions. 

Option 2: Extend The Time To Goal

If the budget is stretched to its maximum, can the goal date extend further into the future, providing a longer investment timeline? Maintaining the same monthly investment of $1,000, you can see it would take just under 25 years to reach the goal. 

Taking one or more of these steps to adjust the budget, income, or timeline will help determine when a goal can realistically be achieved. 

Option 3: Do Both

By increasing the contributions to whatever is manageable and being more flexible on the timeline for your long term financial goal, Andrea can still work diligently toward her goal, even if it will take her a little bit longer than she hoped. 

Start Investing

Now that Andrea knows how much is needed, she actually needs to begin investing as soon as possible to reach her long term financial goals. As a beginner investor she has some things to consider before beginning her investing journey. When she is ready, opening a brokerage account is the first step!

Next, you can choose which type of account you want to invest within, for example, TFSA, RRSP, FHSA, or personal taxable accounts are most common. 

Fund your account by transferring money from your bank, and then purchase your investment. Read this post to learn more about investing in Canada. If you need a primer, dive into our course for a more detailed study plan on investing for beginners. 

Key Tips For Investing

I am not a registered Advisor, I will never tell you what\’s \”the best stock\” or what stock or fund to invest in. However, I do have some general tips and guidelines to help make investing for your long term financial goals a better experience!

1. Use the \”Pay Yourself First\” method to set aside your money for investing right when you get paid, instead of investing only what is left at the end of the month 
2. Maximize tax advantaged accounts first. 
3. Invest regularly no matter what the market is doing.  Try not to get too stressed or too excited when the market is down or up, just keep on investing. 
4. Investing is not a get rich quick scheme. Have a long term mindset to investing, and don\’t pay attention to the hot stock tips you might hear about. 
5. Go for the whole stock market rather than trying to pick individual stocks. Look into broad based ETF\’s and Index funds.  Don\’t put all your eggs in one company\’s basket!
6. Always seek to minimize your fees. Be aware of what fees your investments and brokerage are charging you.

Now that you know how to calculate your long-term financial goals, you are ready to start your journey toward your long-term financial goals today.

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About The Author

Jessica Morgan

Jessica Morgan is the founder and CEO of Canadianbudget.ca. She is passionate about personal finance and helping Canadians improve their financial literacy by providing more Canadian focused financial content. A millennial mom of one, she has a burning obsession with all things personal finance.
Jessica has a BA in East Asian Studies from York University and a Masters in Business Administration from Toronto Metropolitan University. She is a career public sector employee with a Hybrid Pension, and an advocate for Canadian women to improve their personal finance knowledge.

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