In part two of "What's your plan" financial advisor Sheryl Sutherland looks at the importance of goal setting and how to go about it in a pragmatic fashion.

By Sheryl Sutherland*

In part one, we looked at the framework and beginnings of a financial plan for 2012. In today's article, I'd like to discuss goals.

Now that you have determined your financial condition (what you are worth, how much you are saving and spending, etc), you need to consider the following: 

1. What are your goals? How much do you need and when?
2. How much risk are you willing to take to reach your goals and how will you manage that risk?
3. What are your preferred investment options and how will you allocate your assets? 

Rank the following from 1 – 12

Managed Funds

Life Insurance

Superannuation

Share market

Restructure portfolio

Initiate financial planning

Reorganise banking

Assess current financial planning

Create a budget

Income Protection/Trauma Insurance Life Insurance/Medical Cover KiwiSaver

You must know why you are investing so as to have clear personal financial objectives. For example, you may want to save and invest for a holiday, a car, a house or a combination of these. You also need to decide how long you want to save and invest for each of those objectives. Do you need your money in the immediate, medium or distant future?

The table below can assist you with identifying your objectives and time frames.

Goals

Next, you need to write down what your goals are for the following time frames:

Short Term (this month) 

Medium-Term (next six months)

Long-Term (two to five years)

Long long-Term (five years to retirement) 

Now that you have established your goals, work out the dollar value. 

Rule of 72

The table below, the Rule of 72, will help you identify how long it will take to achieve that goal, at a fixed rate.

If you think you will earn 10 per cent on your money, it will take 7.2 years to double your money (72 ÷ 10 = 7.2). This exercise is important – if you want to take less risk and a lower return, say 6 per cent, it will take 12 years for your money to double.

Should you therefore consider a higher risk, higher return investment? Rule of 72 72 ÷ Interest Rate = Years to double your money 72 ÷ 12 per cent = 6 72 ÷ 10 per cent = 7.2 72 ÷ 8 per cent = 9.0 72 ÷ 6 per cent = 12.0

Finally in Step 2, a quick word on who should be organising all of this.

The only person who can decide if you can handle your own investments is you! Ask yourself several questions. First, do you know enough about investing (asset allocation, portfolio management and diversification)? If not, then you either need to get educated or you need an adviser to assist you. Look in the mirror – would you hire this person to manage your portfolio knowing how much education and experience you have?

*Sheryl Sutherland is director of The Financial Strategies Group and co-author of Smart Money,  and author of Girls Just Want to Have Funds and Money, Money, Money, Ain't it Funny.