The renowned writer Alexander Milne once wrote, 'When you don't know where you're going, you’ll end up someplace else.' This thought rings particularly true when it comes to our finances. To achieve satisfaction in life, it is important to set goals and plan how to realise them. 

Throughout the different stages of life, people define combinations of goals with varying priorities, such as: to start a family and raise children; to leave a mark in history with their creative achievements or sports accomplishments; to contribute to scientific and technological development; to achieve material security with a large home, a vacation property, a modern luxury car; or to satisfy the thirst for cultural experiences through a round-the-world trip or a collection of artworks, and so on. No matter how different these goals might be, the common thing among them is that even when they are not material, achieving them always requires allocating the necessary resources (e.g., the time invested in education or career growth). 

Even if you know what your goal is, in order to achieve it, you need an action plan with specific stages arranged chronologically over time. Usually, many of the steps to fulfil these goals have financial implications. This is most evident in the price of a desired property, car, or trip, but it also applies to non-material goals. You will need funds for education, and while you are studying, you will miss out on the income you could have earned if you were working. Thus, achieving one’s life goals is invariably linked to developing and implementing a financial plan to secure the necessary resources. 

In general, the financial planning process includes: setting financial goals, defining their financial and time parameters, and choosing the means to achieve them according to one's individual risk profile. 

 

1.      Setting Financial Goals 

Financial goals are essentially a combination of numerical expressions - monetary or material - of the invested resources and achieved results (benefits or realized returns). Therefore, they are always tied to saving resources, often meaning giving up part of the current consumption to achieve greater financial security or opportunities in the future. When you invest, you expect your investments to grow over time, enabling you to consume more in the future. 

From the perspective of their timeframe, financial goals can be classified into three main categories: short-term (6 to 18 months), medium-term (up to 5 years), and long-term (over 5 years to 20-30 years). 

·         Short-term (6 to 18 months): For example, planned repairs, vacations, the purchase of furniture or appliances. 

·         Medium-term (up to 5 years): For example, university education, the purchase of a vacation property, an important celebration involving significant expenses, or another expensive acquisition which cannot be bought through one’s current income. 

·         Long-term (5 to 10, 20, or even 30 years): For repaying a mortgage loan, securing income for the years when we cannot or do not wish to work. 

 

Additionally, goals can be classified according to their specific focus, which may require a different time frame, depending on the situation. Such goals could be, for example:

·         Creating and Maintaining an Emergency Fund: An emergency fund typically represents the amount needed to cover the essential expenses of an individual or household for 6 months, or even 12 months for those with freelance professions or irregular income. This fund acts as a safety net for unforeseen circumstances, allowing you to handle unexpected expenses without resorting to your specific savings or investments. Traditionally, this fund consists of savings that are highly liquid (cash), as there is a high likelihood that these resources will be needed at some point. However, part of the fund can also be invested in highly liquid assets with minimal expected returns since their timeframe is usually very short.

·         Financing Education: This requires a specific approach, tailored to each situation, as it depends on the person’s age, expected duration of studies, and tuition fees for the specific type of educational institution - kindergarten, school, or university, as well as all related expenses.

·         Purchasing a Primary Residence, especially a first home: This is a long-term financial goal often requiring the accumulation of significant initial capital. This goal is usually of high priority for younger people and is planned in alignment with the terms of mortgage loans.

·         Family Planning and Health Care: This includes expenses for family events such as weddings, childbirth, as well as health-related costs, especially in cases of serious illnesses or other unforeseen circumstances. These goals necessitate the creation and maintenance of both an emergency fund and the provision of appropriate insurance and specialized savings plans.

·         Enhancing the Standard of Living: On the one hand, this may involve material acquisitions such as purchasing a larger, more comfortable, safer, and more modern car; buying a home with more space and a central location; or acquiring a vacation property near the sea or mountains. Alternatively, it could focus on spiritual or cultural values - visiting exotic destinations, organizing a round-the-world trip, or collecting works of art, etc.

·         Charity and Social Causes: Increasingly, more and more people are engaging in philanthropy. Besides dedicating one’s time to charity, this may involve donating financial resources.

·         Social and Environmental Sustainability: For some individuals, these are defining factors, leading them to prioritise investments in projects and companies that align with their values related to ecology, social issues, and good governance standards (ESG).

·         Inheritance Planning: This involves investing to transfer assets to the next generation and is a well-known and common goal.

 

2.      Defining Specific Parameters of Financial Goals 

Once the goals are established, it is important to determine precise timeframes and financial parameters for each of them. 

Financial goals, like all well-formulated goals, should be specific, measurable, achievable, realistic, and time-related - commonly known as SMART goals (This acronym stands for specific, measurable, achievable, realistic, time-related).

For example, if the goal is securing funds for university education, it could be formulated as: ‘Funds are needed to cover the first two years of university education. These funds will be required in 10 years, and based on current estimates, the costs amount to 8,000 euros per year’.  The planning in this particular case includes forecasting the necessary amount and anticipating a potential rise in education costs to prepare for the actual value of this goal.

Additionally, you should assess whether your goal is realistic - you need to allocate funds from your current consumption without drastically compromising your standard of living. Therefore, you must determine the amount you can set aside for investments - either as a lump sum or periodically.

A well-defined goal - clearly described with specific parameters regarding the timeframe and expected costs - facilitates the selection of investment tools and strategies.

 

3.      Determining the Risk Profile 

This step is crucial because it involves identifying the most suitable investment tools for you. To properly assess the risk profile, three key dimensions of risk need to be considered, two of which are financial metrics, and one is a psychological characteristic: 

·         Risk required: Refers to the return needed to achieve your goal. 

·         Risk capacity: Reflects the extent to which your plans can withstand the impact of adverse events and endure losses without leading to an inability to achieve the goal. 

·         Risk tolerance: Represents your personal attitude and readiness to take on financial risk.

 

4.      Selecting Tools to Achieve the Financial Goal 

At this stage, the question of which tools to use to reach your financial goals is answered. Here are some illustrative examples: 

·         For short-term goals, tools offering quick liquidity are appropriate - such as payment or savings accounts, as well as fixed-term bank deposits. More experienced investors may consider structured deposits with guaranteed principal or conservative money-market funds. 

·         For medium-term goals, investments in bonds or bond-based funds can form a solid foundation for building a portfolio. 

·         For long-term goals, a good balance between investments in stocks and bonds, diversified geographically and sectorally, is a commonly recommended solution. For goals with a timeframe longer than 10 years, investments in stocks have historically provided the best long-term returns. However, it is important to emphasize that historical data is not a condition or guarantee for future returns. 

A recommended strategy, especially for goals with a timeframe exceeding several years, is to create an appropriate investment portfolio to benefit from the advantages of diversification. You can undertake this yourself by considering the specifics of different financial tools or rely on a professional to develop a strategy tailored to your specific goals. Another option is to select funds with a defined investment policy and asset allocation strategy. Regardless of the outlined approaches in terms of tools and the duration of investments, they must always correspond to your personal goals and risk profile. 

An invaluable practical tool that helps you execute your financial plan is the budget. Short-term goals are usually directly reflected in a specific budget item - such as building up an emergency fund or repaying the cost of a computer necessary for educational purposes. Through the budget, long-term goals are distributed into smaller milestones over time, with each period (month or year) contributing to the corresponding extent to the achievement of the future goal - for example, saving funds for a down payment when purchasing real estate with a mortgage loan or allocating funds for retirement.