For many families, 2022 is going to be a pivotal year. Following two years of pandemic chaos, there’s a feeling of renewed optimism among families that things can finally get back to normal. However, optimism is no substitute for having clearly defined, achievable goals — without which very little will get accomplished. Moreover, goals without a strategy to achieve them are no more than pipedreams.
For young families, the goals can be significant – buying a house, having more children, funding college or building wealth for a secure retirement. But if goals are not perceived as achievable, they become hopeful aspirations, which don’t inspire people to take action or make sacrifices.
Time and financial goals
Time is a critical resource when planning for your future. It’s one of the few resources we can control, but it’s a wasting resource. That means every day that passes in which you don’t act on your goals, their cost increases. The more time that passes without contributing to your goals, the greater the obstacles to achieving them.
Here are the primary obstacles to achieving financial independence:
Shrinking value of time
You’ve no doubt heard the “time value of money” discussed as it relates to finances. Essentially, it ties the growth of money to the amount of time it is allowed to work. The more time money has to work, the less it will cost to achieve the goal. Conversely, the less time you have, the more it will cost, which is referred to as “the cost of waiting”.
Higher risk as a substitute for time
The longer your time horizon, the less your money needs to grow; that means you can take less risk to achieve the necessary returns to achieve your goal. With more time, money benefits from the “magic of compounding,” allowing it to grow more quickly. With less time, it may become necessary to assume higher risks to grow your money, thereby jeopardizing your goals.
Inflation eats the value of money for breakfast. Based on an average inflation rate of 3%, the value of money, also referred to as purchasing power, is reduced by half over 23 years — by nearly ten years at 7% inflation. When you account for inflation in planning for the future, it increases the cost of your goals. Time allows your money to work longer and harder to overcome the impact of inflation.
Along with inflation, taxes can threaten your future cash flow. However, given the time to plan properly, taxes can be mitigated.
Life happens; often in ways we can’t anticipate. The sooner you have set your wealth management goals, the more time you have to make any adjustments based on what life throws at you.
When clearly defined and quantified, your wealth management goals become your investment benchmarks. This enables you to form an investment strategy and make financial decisions based on where you are in relation to your goals. With time on your side, you can stay focused on your goals with the confidence to adhere to your strategy.