Setting Financial Goals

When I first learned about the concept of financial freedom, I thought that to reach that milestone, I would need a vast amount of money. Many people probably share the same thought, setting a $1 million milestone (~24 billion VND) as their target for financial freedom.

Later, when I sat down and calculated based on real numbers, I realized that the amount needed to achieve financial freedom milestones wasn't as large as I thought. And here is more good news: this amount is well within the reach of what I (and you) can achieve.

When researching blogs, books, and courses on personal finance, I saw that they all divide the journey to financial freedom into several small milestones. Some divide it into 5 stages, others into 7, but for me, simplification always makes it more accessible and motivating to pursue. Therefore, I only divide my financial milestones into 3 objectives as follows:

• Financial Security

• Financial Independence

• Financial Freedom

I will detail how I set specific numbers for each financial goal in this article. But to calculate specific figures for your own financial goals, first, we need to create a personal finance tracker (with my recommended duration of at least 3 months).

Recording incomes and expenses will help us see:

• Where is our money located?

• What do we usually spend money on? How much do we spend in each category?

• How much is our monthly income?

From these real numbers, we can accurately calculate the amount we need to accumulate to achieve each specific financial goal.

Now, let's move into the main part of the article - explaining the meaning of financial goals and how to calculate the specific numbers for each.

1. The First Goal - Financial Security

Financial security is a state where we have enough financial resources to cover our minimum standard of living for the rest of our lives.

This means that once we achieve financial security, even if we were fired tomorrow and remained unemployed for life (meaning no ability to earn money), we would still have enough money to not worry about starving or becoming homeless.

Here is how I set the figure for my financial security goal:

Step 1 - Calculate total annual must-have expenses

Based on my personal finance tracker, my minimum monthly expenses include:

*Note that because I live in Hanoi, Vietnam so I will use Vietnam's currency and local living standard price in 2023 to calculate. You can freely use your own data to calculate.

Details about the figures:

• Food = 30,000/meal * 3 meals/day * 30 days = 2,700,000 VND (Actually, I only spend 60,000 VND for all 3 meals/day, but I calculated a bit extra just in case).

• Transportation = 160,000 gas (or electricity) + 100,000 monthly parking + 50,000 incidentals = 310,000 VND.

• Rent is fixed at 2,500,000 VND/month, which covers a decent place in Hanoi.

• Electricity + Water are based on my average monthly usage.

• Internet + Mobile monthly plans are also averaged based on my usage.

• Clothing is calculated relatively (as some months I buy, some I don't).

• Toiletries include expenses related to soap, detergent, toothbrushes, etc.

• Finally, an amount allocated for other essential costs.

Thus, my total minimum annual spending will be approximately:

7,880,000 VND * 12 = 94,560,000 VND

Step 2 - Calculate the target amount to achieve

Typically, to calculate the target amount for financial freedom or retirement, people use the 4% Rule (also known as the Rule of 25).

The 4% Rule (or Rule of 25) is based on the assumption that we have an average annual investment return rate of 4%. By withdrawing 4% from the accumulated amount annually, we hope not to run out of money while maintaining our desired standard of living. The principle of this rule is to multiply your desired annual withdrawal by 25. The result gives the amount needed to be accumulated to achieve that goal.

Applying the 4% Rule to my case, with a total annual minimum expenditure of 94,560,000 VND, the amount I need to achieve financial security is:

94,560,000 * 25 = 2,364,000,000 VND

This means if I have 2,364,000,000 VND and save it in a bank with a 4% annual interest rate, every year I would earn:

2,364,000,000 * 4% = 94,560,000 VND

This interest amount exactly matches my total minimum annual spending. Thus, with just the bank interest, I would no longer need to work to cover basic living costs.

That is the simplest way to find the target amount needed for financial security. However, the 4% rule is only relative, and many important factors in Vietnam are not accounted for, such as inflation, the investment environment, etc. Therefore, I recommend using the General Formula mentioned in Section 4 to adjust variables for more accurate results.

2. The Second Goal - Financial Independence

Financial independence is a state where we have enough financial resources to live for the rest of our lives with a comfortable standard of living.

Of course, no one wants to live in a way where "survival is enough," right? Humans evolve, society develops. We want to live not just physically but also mentally. Buying things we like, owning things we love, traveling, and enjoying exquisite food are the needs of not just me, but most people.

After reaching the amount that ensures "survival," you can start thinking about a plan that allows you to loosen your purse strings more comfortably and spend on a life that satisfies you mentally.

Here is my calculation for that scenario:

Step 1 - Calculate total annual spending for a comfortable life

Based on my personal finance tracker, the expenses for a comfortable life (including must-have, nice-to-have, and wasted expenses) for me per month include:

Details about the figures:

• Must-have expenses like food, rent, electricity, etc., are exactly the same as in Section 1, but I allow myself to spend more on each category for a more comfortable life.

• I added shopping and entertainment as two needs to satisfy personal desires.

Thus, my total comfortable annual spending will be approximately:

19,820,000 VND * 12 = 237,840,000 VND

Step 2 - Calculate the target amount to achieve

Just like calculating the amount for financial security, we apply the 4% Rule with a total annual expenditure of 237,840,000 VND. The amount I need to achieve financial independence is:

237,840,000 * 25 = 5,946,000,000 VND

And as mentioned above, the 4% Rule is only relative. I recommend using the General Formula mentioned in Section 4 for better accuracy.

3. The Final Goal - Financial Freedom

Financial freedom is the state where we have enough financial resources to realize our dreams.

No longer worrying about starvation because Financial Security protects us. No longer afraid of living in hardship because Financial Independence provides us with passive cash flows for our mental well-being. We are completely free to design our lives.

Once you begin to conquer this goal, you are fully financially free. At this point, the plans created are no longer about "survival" or "mental satisfaction." We are here to plan for the dreams and mission of our lives.

In this section, I will not give specific personal examples because everyone has different dreams, and different dreams have their own price tags. We can design financial plans for a start-up company we've long dreamed of, charitable programs we want to support, or simply plan to travel the world or buy the most luxurious items.

Whatever your dream is, once you step onto this final journey, you will have enough financial knowledge to calculate the numbers for yourself!

4. Adjusting the Figures

As mentioned, the 4% Rule is somewhat formulaic as it was conceived by economist William Bengen for Western economies in the 1990s for accumulated funds to be used over 30 years.

Consequently, this rule leaves out critical factors like inflation and the local investment environment, making it less accurate for Eastern economies. Therefore, I have two recommendations to help you calculate your target figure more accurately:

Recommendation 1 - Use a General Formula

G = C / (r - i)

Where:

• G - The amount needed to achieve the financial goal

• C - The amount to be withdrawn annually

• r - The annual return rate of personal investments

• i - The inflation rate

In the case of calculating my financial security target:

• Annual withdrawal amount = total annual minimum expenses → C = 94,560,000 VND.

• Statistically, my annual personal investment return rate is 10% → r = 10%.

• The average inflation rate in Vietnam is 4% → i = 4%.

Plugging the numbers into the formula, the amount I need to reach financial security is:

94,560,000 / (10% - 4%) = 1,576,000,000 VND

From the results above, it's clear that the general formula allows us to adjust variables (return rate and inflation rate) to be closer to the reality of where we live → providing a more accurate number for each individual.

Recommendation 2 - Account for inflation in your timeline

Additionally, for greater accuracy, we must factor in inflation at the time we intend to reach the financial milestone.

For example, in the table below, my current total minimum spending (2023) is about 94,560,000 VND/year → I would need to accumulate 1,576,000,000 VND for financial security.

But if I am not yet able to reach this goal in 2023 and must wait until 2030, the amount I need to accumulate will be 2,073,908,484 VND, not 1,576,000,000 VND.

This is because annual inflation increases living costs → we must update the required accumulation after accounting for inflation.

If inflation is 4%/year → living costs increase by 4% → the amount needed for the financial goal must also increase by 4%.

Bottom lines

In summary, in this article, I have shared 3 main contents:

• How I divide my financial freedom journey into 3 milestones: Financial Security, Financial Independence, and Financial Freedom.

• How I calculate the amount needed for these 3 milestones (based on the 4% Rule).

• An introduction to a General Formula and accounting for inflation to adjust target numbers more accurately.

Of course, this is not the only way to set financial goals. And it is not yet a comprehensive calculation method (e.g., factors like health insurance, social security, health defense, etc., were not included in my calculation).

Nonetheless, having used this setup and calculation for 4 years, I think it is a simple and accessible method for most people, especially those not familiar with the complicated formulas of the financial industry.

As I've said in many other articles, there is no one-size-fits-all formula. Let's view this article only as a reference and discover the method that is most suitable and effective for yourself.

Finally, I wish everyone steady steps on the path to conquering their own financial freedom 🫰🏻!

*Images in this article were sourced from Flaticon

Thank you for reading my article!

Kim,