Reaching your financial goals requires more than just setting a target - it's about having a clear plan to get there.
This guide will help you figure out how to plan effectively by setting a budget and calculating how long it will take to reach your target.
With this step-by-step approach, you'll be better prepared to map out your financial journey and stay on track.
1. Define your goal
The first and most important step is to clearly define what you are saving for. Be specific about both the amount you need and the purpose of the savings. Having a well-defined goal will help you stay focused and make it easier to create a realistic savings plan.
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What are you saving for?
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How much do you need to reach your goal?
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Property deposit: - £30,000
This is a common goal for first-time homebuyers. The average price of a property in the UK is around £300,000, so a 10% deposit typically amounts to approximately £30,000. Depending on where you live, this amount may vary, so consider adjusting based on the average house prices in your area.
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Wedding: - £10,000
The cost of a wedding can vary significantly, but the average cost in the UK is around £18,000 to £20,000. Many couples opt for smaller, more intimate ceremonies and aim to spend closer to £10,000.
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School fees: - £120,000
Private school fees can be substantial. On average, yearly fees for private schools in the UK range from £12,000 to £18,000 per year. Over several years of education, these costs can add up to £120,000 or more.
2. Estimate your rate of return
Calculating how long it will take to reach your financial goal depends primarily on the rate of return you can expect from your chosen financial vehicle.
The higher your rate of return, the less time it will take to accumulate the necessary funds. However, the predictability of this growth varies depending on the financial product you choose.
The rate of return tends to be more stable and predictable for savings accounts, making it easier to estimate how long it will take to meet your goal. Savings accounts typically offer returns in the range of 3% to 4% annually.
Fixed-rate savings accounts guarantee the same return over a set period, meaning you can predict your timeline with relative certainty. Variable-rate accounts offer the potential for the rate to change over time, which means the time horizon for reaching your goal could shift if the rate increases or decreases during the saving period.
Investing, on the other hand, offers the potential for higher returns, but with less predictability. Over a long period, investments like stocks, bonds, or mutual funds tend to generate higher returns, typically averaging between 5% and 8% annually.
However, these returns can fluctuate based on market performance, meaning your investments may grow faster or slower than anticipated. This variability makes investing more suitable for long-term goals, typically those 5 years or more in the future. The longer the timeframe, the more likely your investments will have time to recover from any market dips and still generate a solid return, shortening the overall time to reach your goal.
3. Run the numbers
Now that you know your goal, time horizon, and whether you're saving or investing, you can calculate how much to save each month.
Formula: The formua for calculating this is:
To simplify things we've developed an easy to use calcualtor below. If you want more control,
try our stand alone
time to target calculator.
4. Adjust your goal for inflation
If your goal is long-term, it's essential to consider inflation, which reduces the purchasing power of money over time. For most long-term goals, adjusting for inflation is crucial to ensure your savings will meet future costs.
The inflation rate typically ranges from 2% to 3% per year, depending on the country and economic conditions. Failing to account for inflation could leave you short of your target, even if you meet your nominal savings goal.
Formula: To adjust an amount for the effects of inflation, use the following formula:
Future value = Present value × (1 + Inflation Rate)Number of years
You want to save £20,000 for a home improvements, and you expect an average annual inflation rate of 2.5%. Using the formula:
Assuming a consistant inflation rate of 2.5%, in 3 years and 2 months you'll need £21,322 to have the equivalent purchasing power of £20,000 today.
5. Review and refine
Before you start saving, it's important to refine your strategy to ensure it aligns with your goal, your financial needs, and your time horizon. The financial vehicle you choose is suitable for both your timeframe and risk tolerance.
Once you've begun saving towards your goal, it's essential to regularly review your progress and make adjustments as needed. Life circumstances can change, and so can financial markets, which may impact your savings or investments.
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Review progress: - Set a schedule to check on your savings or investments at least annually, or more frequently if possible. This allows you to track how close you are to your goal and whether you're still on track with your original timeline. For example, if you've invested in the market, assess whether market fluctuations have impacted your growth. If you're saving in an account with a variable rate, review whether the rate has shifted and how that affects your projected timeline.
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Adjust contributions or expectations: - If your returns are lower than expected or your financial circumstances have changed, you may need to adjust your contributions. You can either increase your savings amount or extend your timeline to accommodate slower-than-expected growth. On the other hand, if your returns exceed expectations, you might reach your goal sooner than anticipated, or reduce your regular contributions to redirect funds elsewhere.
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Refine your goal: - As you progress, your financial goals may change. For instance, if you're saving for a house deposit, rising property prices or shifts in your personal preferences may require you to adjust the target amount. Similarly, if you're saving for long-term goals such as retirement or education, inflation may necessitate adjusting your savings target to ensure you maintain the same purchasing power over time.
By regularly reviewing your strategy and refining your approach, you can stay flexible and proactive in achieving your financial goals. This adaptability ensures that you're prepared for unexpected changes, giving you greater control over your financial future.