Setting Financial Goals

When I first came across the concept of financial freedom , I thought achieving that milestone would require an enormous fortune. Many people might share the same mindset, setting a target milestone of $1 million (~26 billion VND) to achieve financial freedom.

Later, when I sat down and did the math based on actual numbers, I realized that the amount needed to reach key financial milestones is nowhere near as overwhelming as I had imagined. And the good news is: these numbers are well within achievable reach for me (and for you).

When studying personal finance blogs, books, and courses, I noticed that experts often break the financial freedom journey down into several smaller milestones. Some split it into 5 stages, others into 7, but I believe simplicity always makes goals easier to approach and stay motivated for. Therefore, I divide my financial journey into just 3 core goals:

• Financial Security

• Financial Independence

• Financial Freedom

In this article, I will explain in detail how I establish specific numbers for each of the financial goals above. However, to calculate specific figures for your own financial goals, you first need to track your personal finances (ideally over a recommended minimum period of 3 months). If you do not yet have data on your income and expenses, refer to the article Building a Personal Expense Tracker to collect the necessary data for your financial goal calculations!

Recording your daily expenses will clarify:

• Where is your money going?

• What do you spend money on, and how much do you spend in each category?

• What is your actual monthly income?

Only with empirical financial figures can you accurately determine the exact amount of money you need to accumulate to achieve each specific financial goal.

Now, let's dive into the core section of this article—explaining the meaning of each financial goal and how to calculate the exact figures for each stage (all converted to USD at an exchange rate of 1 USD = 26,000 VND).

1. First Goal - Financial Security

Financial Security is a state in which you have sufficient financial resources to cover your minimum living expenses for the rest of your life.

This means that once you achieve Financial Security , even if you were laid off tomorrow and unable to earn money for the rest of your life, you would still have enough money to ensure you never face starvation, lack of clean water, or homelessness.

Here is how I calculate the target number for my Financial Security goal:

Step 1 - Calculate total annual must-have expenses

Based on my personal expense tracker, here are my monthly minimum essential expenses (must-have expenses) as recorded in 2023 (converted at 1 USD = 26,000 VND):

Breakdown of figures:

• Food = $1.15/meal * 3 meals/day * 30 days = $103.85 (in reality, 3 meals a day cost me around $2.31, but I budget generously).

• Transportation = $6.15 for fuel (or electricity) + $3.85 for monthly parking + $1.92 for incidental costs = $11.92.

• Housing rent is fixed at $96.15/month, which secures a modest room in Hanoi.

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

• Monthly Internet + 4G packages are also calculated based on average usage.

• Clothing is estimated on average (since some months require purchases and others do not).

• Toiletries include basic personal care items such as soap, laundry detergent, toothbrushes, etc.

• Finally, a cushion amount is reserved for other mandatory miscellaneous expenses.

Thus, my total minimum essential expenses per year amount to approximately:

$303.08 * 12 = $3,636.92

Step 2 - Calculate the required target amount

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

The 4% Rule is a personal financial management principle derived from a 1994 study by William Bengen. It states that to retire safely over a 30-year horizon, you need to accumulate a net worth equal to 25 times your annual expenses . Upon retirement, withdrawing 4% of your savings annually covers living expenses while the remaining balance stays invested to generate returns, maintaining your standard of living without exhausting your wealth.

Applying the 4% rule to my situation with annual minimum expenses of $3,636.92, the target capital required to reach Financial Security is:

$3,636.92 * 25 = $90,923.00

This means if I hold $90,923.00 in a savings account earning a 4% annual interest rate, the interest generated each year will be:

$90,923.00 * 4% = $3,636.92

This annual interest payment matches my total essential annual expenses exactly. Therefore, purely through bank interest income, I would no longer need to work to cover baseline survival expenses.

This is the simplest method for determining your Financial Security target figure. However, the 4% rule is an empirical rule developed by financial advisor William Bengen in 1994 based on US market historical data, and certain assumptions do not fully align with emerging market economic environments like Vietnam. Thus, I recommend using the generalized formula introduced in Section 4 to adjust variables and achieve precise, customized results.

2. Second Goal - Financial Independence

Financial Independence is a state in which you have sufficient financial resources to live comfortably for the rest of your life at a comfortable standard of living .

Of course, nobody wants to settle for mere survival. As individuals and society progress, we desire to live well—not just physically, but also mentally and emotionally. Purchasing things we enjoy, traveling, and savoring quality food are natural aspirations for most of us.

Once you have secured the capital required for baseline survival, you can begin planning for a broader budget that supports a fulfilling, comfortable lifestyle.

Here is my calculation for that scenario:

Step 1 - Calculate total annual expenses for a comfortable life

Based on my personal finance tracker, here are my monthly comfortable living expenses (combining must-have and nice-to-have expenses) as recorded in 2023 (converted at 1 USD = 26,000 VND):

Breakdown of figures:

• Essential expenses like dining, rent, and utilities remain similar to Step 1 of Financial Security , but with higher allocations to allow for greater comfort.

• I added shopping and entertainment allocations as dedicated discretionary categories to satisfy personal aspirations.

Thus, my total comfortable annual living expenses come to approximately:

$762.31 * 12 = $9,147.72

Step 2 - Calculate the required target amount

Just as with calculating Financial Security, applying the 4% rule to annual comfortable living expenses of $9,147.72 yields the target capital needed for Financial Independence :

$9,147.72 * 25 = $228,693.00

As noted earlier, since the 4% rule provides a simplified estimate, you should use the generalized mathematical formula in Section 4 to adjust economic parameters and calculate precise numbers tailored to your situation.

3. Final Goal - Financial Freedom

Financial Freedom is a state in which you possess sufficient financial resources to fulfill your personal dreams .

You no longer worry about survival because you have attained Financial Security . You no longer fear frugality because you have reached Financial Independence . At this level, you are completely free to design the exact life you dream of.

I will refrain from sharing specific personal target figures here because everyone has unique dreams, and every dream carries its own price tag. Furthermore, by the time you embark on this final stage, you will already possess sufficient financial literacy and experience to compute the exact figures for your own aspirations.

From here, you can build financial roadmaps to launch a startup you have long envisioned, establish charitable initiatives, travel the world, or indulge in luxury experiences... Feel free to calculate and craft your dream life!

4. Adjusting the Numbers

As mentioned above, the 4% rule relies on a standardized framework researched by financial advisor William Bengen in the 1990s based on Western economic conditions over a 30-year retirement horizon.

When applying this rule to developing market economies in Asia (such as Vietnam), the formula requires refinement due to distinct economic growth, inflation, and investment yield environments. To obtain a more precise calculation, I recommend using the following generalized formula:

If finding it difficult to calculate, you can use the Retirement Savings Calculator that I developed to instantly compute your target fund and visualize the trajectory with interactive charts!

Applying to a practical example: Assume retirement at age 40, a life expectancy of 100 years (yielding 60 retirement years), and annual expenses of $3,653.85 (~95,000,000 VND). Unused retirement funds are invested/saved at a 10% annual return rate, with an annual inflation rate of 4%. What is the total retirement fund required to live comfortably to age 100 while maintaining a 10% capital buffer for unforeseen emergencies?

Plugging the example parameters into the formula variables:

• C = $3,653.85

• r = 10% = 0.10

• i = 4% = 0.04

• n = 100 - 40 = 60 (years)

• P = 10% = 0.10

Substituting into the formula:

Executing the calculation step-by-step:

You need to accumulate exactly $61,165.30 at the start of age 40.

Asset Trajectory Simulation Table:

Here is the cash flow trajectory illustrating how your portfolio balances fluctuate over time based on the initial capital X calculated above:

As demonstrated, adjusting for annual inflation on cash withdrawals yields precise results. After taking the final living expense withdrawal at age 100 (the 60th retirement year), the remaining retirement fund balance equals $6,116.53 — matching exactly 10% of the initial capital $61,165.30 — providing an emergency reserve cushion.

The numbers in the example we just calculated are actually the same ones I drew from the financial security section. You can see that once you sit down and run the numbers, the actual amount needed to meet your financial goal is well within reach. It is vastly different from the multi-million dollar we often imagine.

Bottom Lines

In summary, through this article, I have shared how I divide the path to financial freedom into 3 manageable milestones for easy calculation and tracking throughout the journey.

Once your financial targets are established, the next crucial step is answering the question: How can we achieve the numbers calculated for each milestone? Continue reading articles in the personal finance series to discover more!

* Images in this article are sourced from Flaticon

Thank you for reading my article!

Kim,

28/05/2024