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Getting from Point A to Point BTo construct your personal wealth-building plan, you need to consider closely 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, that is, reduce it to a monetary amount, and set a deadline for attaining it. Most financial plans are geared toward an event in the future -- often in the distant future -- such as saving for your children's college education or saving for retirement. Because most costs increase over time, and because you'll want to invest your savings so that the amounts increase in value over time, determining how much to set aside each month (or other saving period) 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: First. Estimate the cost of the goal at the date you plan to attain it. Take the current cost of the goal and adjust it for inflation up through the time you will reach the goal.
Second. Determine the amount of your current savings that you will earmark for this goal. Then, figure how much it will grow between now and the date on which you want to reach your goal. (The process of doing this 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 that should exceed inflation.) Third. Based upon the shortfall between the cost of your goal and the projected growth of your savings, determine how much you will periodically save to reach your goal. Then, determine 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 through a tax-deferred method (such as within a qualified retirement plan or an insurance policy), you should make this computation based on after-tax yields. Fourth. Add the amount of your projected investments as of the date you wish to attain the goal (amounts determined under the second and third steps, above) and compare this amount to the amount of your projected future cost of the goal. If the amount of your projected investments is greater than the amount of your projected cost of the goal, you'll know your saving and investment plan should work out to allow you to attain your goal. (This will be true if the various assumptions you made in the course of setting up your plan are correct, and then do not change for the worse 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. You probably won't feel much pressure to change your wealth-building plan if your planning computations show that you are on track to reach your goal at the desired time. If you'll end up with more money than is needed to fund your plan, you can redirect excess savings for other purposes, or merely "let it ride" against the eventuality that somehow the goal will turn out to be more expensive than you thought. In any case, you probably don't have a situation that needs to be addressed in a big hurry. If, however, the amount of your projected investments is less than the amount of your projected cost of the goal, something must be done or it's unlikely that you will be able to achieve the goal. If this is the case, you can make one or more of the following adjustments to bring your plan back on track:
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