Financial Goal Setting

Everyday people go through life trying to get stuff done.

Things like; make breakfast, hit the gym, get the kids to school, finish the project at work, set up plans for the weekend, finish the book and catch up on the latest show.

All of these things are for the “here and now” and always seem to take precedent over the “tomorrow and beyond.”

I can confirm this through my experience as a Certified Financial Planner.

I have learned that most people push their financial goals so far to the back of their brain they can barely find them.

It is my job to help people pull them out, define them and create a plan of action to actually accomplish them.

Goals

For the average person, the goals are very similar. Be able to send children to college, reach financial independent around age 65, make a large purchase in the future (house) and have enough money in the bank in case of emergency.

Do these sound familiar?

Hopefully by now you started thinking about your own life and financial future.

The next logical question is now that I know what I want to accomplish, how do I actually do it?

Read on to find out!

Easy but Bad Idea!

Go out into your backyard and dig a nice size hole. Every month, throw $50 into it, but don’t take any money out until you’re ready to buy a house, send your child to college, or retire.

It sounds a little crazy, doesn’t it?

If you’re lucky, you may end up with enough money to meet your needs, but you have no way to know for sure.

 Better Idea

Start with your time horizon

Your investment time horizon is the number of years you have to invest toward a specific goal. Each investment goal you set will have a different time horizon. For example, some of your investment goals will be long term (e.g., you have more than 15 years to plan), some will be short term (e.g., you have 5 years or less to plan), and some will be intermediate (e.g., you have between 5 and 15 years to plan). Establishing time horizons will help you determine how aggressively you will need to invest to accumulate the amount needed to meet your goals.

 How much will you need to invest?

Although you can invest a lump sum of cash, many people find that regular, systematic investing is also a great way to build wealth over time.

Start by determining how much you’ll need to set aside monthly or annually to meet each goal.

Although you’ll want to invest as much as possible, choose a realistic amount that takes into account your other financial obligations, so that you can easily stick with your plan. But always be on the lookout for opportunities to increase the amount you’re investing, such as participating in an automatic investment program that boosts your contribution by a certain percentage each year, or by dedicating a portion of every raise, bonus, cash gift, or tax refund you receive to your investment objectives.

Which investments should you choose?

Regardless of your financial goals, you’ll need to decide how to best allocate your investment dollars. One important consideration is your tolerance for risk. All investments involve some risk, but some involve more than others. How well can you handle market ups and downs? Are you willing to accept a higher degree of risk in exchange for the opportunity to earn a higher rate of return?

Whether you’re investing for retirement, college, or another financial goal, your overall objective is to maximize returns without taking on more risk than you can bear. But no matter what level of risk you’re comfortable with, make sure to choose investments that are consistent with your goals and time horizon. A financial professional can help you construct a diversified investment portfolio that takes these factors into account.

Investing for retirement

After a hard day at the office, do you ask yourself, “Is it time to retire yet?” Retirement may seem a long way off, but it’s never too early to start planning, especially if you want retirement to be the good life you imagine.

For example, let’s say that your goal is to retire at age 65. At age 20 you begin contributing $3,000 per year to your tax-deferred 401(k) account. If your investment earns 6% per year, compounded annually, you’ll have approximately $679,000 in your investment account when you retire. (Illustrative purposes only)

But what would happen if you left things to chance instead?

Let’s say that you’re not really worried about retirement, so you wait until you’re 35 to begin investing. Assuming you contributed the same amount to your 401(k) and the rate of return on your investment dollars was the same, you would end up with approximately $254,400. And, as this chart illustrates, if you were to wait until age 45 to begin investing for retirement, you would end up with only about $120,000 by the time you retire.

 

(This hypothetical example is not intended to reflect the actual performance of any investment. Taxes and investment fees are not considered.)

Investing for college

Perhaps you faced the truth the day your child was born. Or maybe it hit you when your child started first grade: You have only so much time to save for college. In fact, for many people, saving for college is an intermediate-term goal–if you start saving when your child is in elementary school, you’ll have 10 to 15 years to build your college fund.

Of course, the earlier you start, the better. The more time you have before you need the money, the greater chance you have to build a substantial college fund due to compounding. With a longer investment time frame and a tolerance for some risk, you might also be willing to put some of your money into investments that offer the potential for growth.

Investing for a major purchase

At some point, you’ll probably want to buy a home, a car, or even that vacation home you’ve always wanted. Although they’re hardly impulse items, large purchases are usually not something for which you plan far in advance; one to five years is a common time frame.

Because you don’t have much time to invest, you’ll have to budget your investment dollars wisely. Rather than choosing growth investments, you may want to put your money into less volatile, highly liquid investments that have some potential for growth, but that offer you quick and easy access to your money should you need it.

Review and revise

Over time, you may need to update your investment strategy. Get in the habit of checking your portfolio at least once a year–more frequently if the market is particularly volatile or when there have been significant changes in your life. You may need to rebalance your portfolio to bring it back in line with your investment goals and risk tolerance.

Investing for Your Goals
Investment goal and time horizon	At 4%, you’ll need to invest	At 8%, you’ll need to invest	At 12%, you’ll need to invest
Have $10,000 for down payment on home: 5 years	$151 per month	$136 per month	$123 per month
Have $50,000 in college fund: 10 years	$340 per month	$276 per month	$223 per month
Have $250,000 in retirement fund: 20 years	$685 per month	$437 per month	$272 per month
Table assumes 3% annual inflation, and that the return is compounded annually; taxes are not considered. Also, rates of return will vary over time, particularly for long-term investments, which could affect the amounts you would need to invest. This hypothetical example is not intended to reflect the actual performance of any investment.

Final Words

In this post, I have laid out the best processes to save and invest for your financial goals. One common theme that runs throughout is that the earlier you start, the less you have to save on a regular basis.  Build the monthly savings into your budget.   This is huge because it should free up cash for all of those other things you want to do TODAY.

As always, you can consult with me to discuss your financial goals!

Look for future posts on the best ways to build the proper investment portfolio for your goals  and check out my recent post on teaching kids how to manage their money.

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Thanks for stopping by and I hope you achieve financial success!