11 Steps To Financial Freedom – Step 5: Set Your Top Three Goals

After reading an article called 11 Steps To Financial Freedom in the latest MoneySense magazine, I thought it would be interesting to go through each of these steps one-by-one and share my results on this blog.  Each week I’ll go through one of the 11 steps to financial freedom, with the intention of creating a complete financial plan by the end of the series.

Over the past month I have prioritized my goals, determined my net worth, recorded my cash flow and compared my spending to my goals.  Now it’s time for step 5: set your top three goals.

Set Your Life Goals

According to the MoneySense article, your financial goals don’t just happen.  You make them happen.  This step requires you to assess where you want to be five, ten and twenty years from now and answer some big questions, such as where you want to live in retirement and when you want to stop working.

Goal setting is a big part of my financial plan, and there is no time like the present to get started on some financial goals that may take 5-20 years to develop.  I’ve written before about my medium term goals as well as my long term goals which I called my retirement plan.

Here’s a quick recap of those goals:

• Upgrade our house (completed in August 2011)
• Triple our total investment portfolio in 5 years
• Increase RRSP and TFSA dividend income in 5 years
• Increase net worth by $300,000 in 5 years
• Retire at 55 with $44,000 in annual investment income and $13,000 in annual pension income (bridge benefit)
• Receive full pension income of approximately $62,400 starting at age 65.

Action Step #5: Set Your Top Three Goals

For this step we needed to fill in “Worksheet 5-Your life and financial goals” and “Worksheet 6-Your top three goals.”  Earlier in this process my wife and I sat down to examine our goals and how they fit in with our spending and saving patterns.  Now we needed to list each of our top four or five goals and assign a dollar value to each, as well as a time frame for achieving the goal.  After comparing how closely our goals align, we listed the three most important goals that we both agreed on, in order of priority.

Achieving balance is important to us when developing our financial plan.  Just over three years ago my wife was diagnosed with Multiple Sclerosis, and since then we have completely changed our philosophy in terms of our financial priorities and life balance.  We ended up starting a family right away and decided that my wife would stay home full time to look after our daughter.  We felt this was the best decision for her long term health as well, and so far she hasn’t had any major issues with her MS.

Long term planning  is always difficult for us because we just don’t know the impact MS will have on our lives in 10-20 years.  Still, it’s important to plan and with that in mind we set out to determine our three most important goals:

Take a 4 week vacation in Ireland

They say you should travel before you get married and start a family, and that certainly was our intention.  Unfortunately life got in the way for us and this trip was put on hold indefinitely.  Instead of dreaming about this vacation we want to make it a reality.   Between airfare, accommodation, car rental, food and entertainment we are budgeting $12,000 for this trip.

We want our daughter to be older so she can enjoy the trip as much as we will, so we’ve set an 8 year deadline to complete this goal.  That will require savings of $1,500 a year, which I will set aside in our high interest savings account.  Time off work won’t be an issue since I get 5 weeks of holidays and should be able to take 4 consecutive weeks off in the late Spring.

• Goal – Trip to Ireland
• Cost – $12,000
• Deadline – 8 years
• Obstacles – n/a
• Action steps – Save $1,500 a year for 8 years

Pay off mortgage in 15 years

Looking back at my previous goals, I found it interesting that I was focused more on investing and less on paying off our mortgage.  But that was before we upgraded our house and took on a mortgage nearly twice the size of our last one.  Even though interest rates are low, we want to pay this mortgage off as quickly as possible.

We started with a mortgage of $315,750 and took out a 5-year term at the variable rate of 2.20% interest.  We’ve already increased our mortgage payments by $500 a month, which reduced our amortization to 16 years.  In order to pay off our mortgage sooner we’ll have to make additional contributions at some point.  An extra $100 a month should get us there.

• Goal – Pay off mortgage
• Cost – $108,000 (extra payments)
• Deadline – 15 years
• Obstacles – As a single income family, we have many competing savings priorities.
• Action steps – $7,200 a year in extra payments

Retire by age 55

We often joke about freedom 55 being just a dream that happens only in television commercials.  But with my defined benefit pension, I’ll reach my maximum benefit by the time I’m 57.  Retiring by age 55 is not out of the question when you consider that our mortgage will be paid off by the time I turn 47.  For the next 8 years we can turn our attention towards maxing out our RRSP and TFSA with the extra $20,000 a year that we were spending on our mortgage.

While I’m still unsure on what to do with my RRSP, I like the fact that this approach really gives us the ability to catch up in what should be my highest earning years.  I’m still targeting a retirement income of $60,000 – $70,000 a year.

• Goal – Retire by 55
• Cost – TBA
• Deadline – 23 years
• Obstacles – Changes in pension plan.  Change of career.
• Action steps – Pay off mortgage in 15 years.  Determine how much money we will need to save outside of my pension in order to reach our target income in retirement

This was an eye-opening exercise for us and one that we found extremely helpful as we put our plan together.  It gives us something to strive for, and I think that focusing on these goals gives us a nice balance of family/lifestyle, debt reduction, saving and investing.  Every year something is bound to come up that impacts our finances in the short term, but we can achieve these goals if we stay committed to our financial plan.

Next week we’ll develop our strategies with step 6: chart a path to your goals.