What goals cost

After you’ve decided what your goals are and when you plan to reach them, it’s time to face reality: How much money are you going to need, exactly?

And it is important to be exact. To get where you want to be, you have to aim toward a set dollar amount. So if you’re serious about your goals, it’s time to get out your calculator.

For example, let’s take a typical mid-term goal: say, putting together the down payment on a home. Suppose you need to have 10% of the purchase price on hand to buy a home and you’d like to buy in about five years. If an average home near you is selling for about $250,000, you’ll need $25,000 in ready cash plus the money to finalize the deal and move in.

Of course, having $25,000 in five years doesn’t mean, necessarily, that you now simply divide $25,000 by five and then by twelve to figure out how much you have to save per month (Hint: $417). While that may get you somewhat close to your goal, you probably wish to be more exact, and you should keep two factors in mind as you make your plans: earnings and inflation. Earnings work for you. Inflation works against you.

By putting your money into the right mix of savings and investments for your time horizon, you can earn money on your money and reach your goal faster. But in the meantime, inflation is eating away at the purchasing power of your money, meaning that the house that costs $250,000 today may cost more in the future.