You may have several financial objectives at any one time, such as to save £500 by the end of the month, or £5,000 for a luxury holiday, or £25,000 for a house deposit, or even to be a millionaire before the age of 40.
All of these are high-level objectives, setting out what you want to achieve and giving you a general direction of travel.
They don’t say how you are going to do it.
Setting an overall objective is important on your journey to financial independence. As it’s a high-level statement, it doesn’t need to be detailed, in fact, it doesn’t even need to contain any specific figures at this stage.
“My objective is to be financially independent by the age of 50. This will require me to have an unearned income stream, equivalent to, or above, my total outgoings at that point in the future”.
This general statement is clear in its intent, even though we don’t yet know some of the key criteria, namely what our outgoings actually will be at that point in the future.
When you start out investing for the long term, and you don’t have any other relevant information to base your calculations on, it is acceptable to use an average to kick things off. So in this instance, we shall assume that the average cost of a month’s outgoings for a typical UK family is about £2,500.
Therefore, our initial annual income objective is £30,000 plus inflation.
Once we know our overarching objective, we can then start to plan the route to get there.
Proper financial planning starts with goal setting, including short, medium and long-term goals. These goals can be reviewed each year and adjusted as required.
Setting a budget
We talked about the importance of setting a budget, and now it is time to put that into action. You simply cannot know where you are going financially until you know where you are right now.
Spend a couple of days looking through your last three months bank statements to establish average expenditure, including phone payments, cash payments, and anything else you can think of that doesn’t show up on your bank statement.
Then write down all the income you receive from any employment, allowances, businesses, savings, investments and anything else you regularly receive.
Finally, you must set out all your financial assets in one place, including any savings, investments or other cash-based items. I do not mean things like cars, bikes and paintings in this example.
Once you have all this information, you can then either populate a ready-made budget found on-line or make your own. There are of course budget Apps that you could use, but you still need to populate the information to begin with.