In order to construct your personal wealth-building plan, you need to carefully consider what you have now and what you want in the future. As a necessary part of the process of setting a goal, you'll want to make the goal measurable by reducing it to a monetary amount and setting a deadline for attaining it.
Most financial plans are focused on goals or events that will happen in the future often in the distant future such as saving for your children's college education or saving for retirement. Because most costs goes up over time, and because you'll want to invest your savings in such way as they will increase in value as time moves on, determining how much to set aside each month (or whatever your saving period is) is a bit more complicated than just dividing the current cost of the item by the number of savings periods you'll have before you reach the deadline that you set for attaining the goal.
You can closely estimate how much attaining your goal will cost and whether you will reach it based on a particular saving and investment plan, by following these steps:
- Estimate the cost of the goal at the date you plan to attain it. To do this, take the current cost of the goal and adjust it for inflation up through the time you will reach the goal.
- Take the amount of your current savings that you will earmark for the goal and determine how much it will grow between now and the date on which you want to reach your goal. This process is identical to that of figuring how much a particular item will increase in cost over time, except that instead of an estimated inflation rate, you'll use an estimated growth rate. You should make the initial calculation based upon what would happen if you did not make changes to your savings vehicles. For example, if you currently have the money in a 10-year certificate of deposit, use that interest rate to determine the rate of growth.
- Determine how much you will periodically save to reach your goal and how much this investment will increase over time based on what you estimate its yield will be over the life of the investment. Unless you will accumulate these savings in a tax-free form (such as municipal bonds), or tax-deferred (such as within a qualified retirement plan, or an insurance policy), you should make this computation based on after-tax yields.
- Add the amounts you determined in Step 2 and Step 3 together. Compare this amount to the project cost of your goal, which you determined in Step 1.
If the amount of your projected investments is greater than the amount of your projected cost of the goal, your savings and investment strategy is on track. Of course, you will need to revisit these calculations periodically to make sure that the various assumptions you made in the course of setting up your plan are correct and have not changed over the course of time.
If the amount of your projected investments is less than the amount of your projected cost of the goal, you'll need to consider making changes necessary to reach your goal.