Setting Goals in your Financial Plan
You have probably heard the old adage, “If you don’t know where you are going, you are likely to end up anywhere”. This applies to finances just as much as it does other aspects of life. A destination is a “goal” and without one there is no way of measuring your performance.
Therefore having a goal is essential to managing your money properly. After all, money is not an ‘end’ in itself. It is merely a ‘means’ to an end. This means we don’t save money for the sake of money but we save it for things such as ‘peace of mind’, college education, retirement, vacation home, etc. The more you understand this, the better equipped you will be for dealing with your own portfolio.
So we now know that having a goal of achieving a particular rate of return is not enough. Instead a better goal would be a goal to achieve “X” rate of return for the purpose of (insert
personal objective here).
It is only when we know the
ultimate purpose of our money
that we can manage it properly.
This is why we set retirement
funds aside in specialized
accounts and this is also why we
put money for emergencies in
accounts that are more liquid
and easier to access.
Essentially, it is the ultimate
“purpose” of the money that
determines where, how and why we
invest it.
Create a
List
Understanding how goals play into our financial life is only part of the equation though. The next step is to actually go through the process and begin to create a list of all the financial goals you have whether they are short term or long term. This should be one of the first steps in financial planning. However, most people tend to invest first and then later on decide what to do with the money and which money will be used to accomplish that objective. The wise investor will decide the purpose of his
or her money first.
What you need to do is take a moment and make a list of all your goals that have a financial commitment behind them.
Think of the following:
retirement, vacations, college
education, a new car, etc.
All of these goals require a
certain amount of money and
therefore they should be
budgeted and planned for over a
period of time rather than
simply taking the money out of
present income or investments.
The first step
toward goal planning is simply
being aware of the many goals
that you have. To do this
look at each area of your life
and determine what goals there
are that require a financial
commitment. Life areas
would include: family, personal,
professional, etc. If you
look at each area separately you
will probably come up with
unique goals and desires that
you would like to achieve in
that particular sphere of life.
Make a list of all of these and
then beside them write down the
amount needed.
The next step
is to prioritize them according
to necessity. Find the
ones most important and list
them first while the ones that
are extraneous should be listed
last. Once you have
done this then you need to see
exactly what kind of return you
need and how long you have to
reach the intended goal.
This information will give you
the rate of return required and
the amount of time invested.
It is only with those two
numbers that you can determine
whether or not a particular
investment is appropriate or
not. Unfortunately most
people never even go through the
thought process of determining
either of these attributes and
as a result they end up in the
wrong investment for the
intended goal.
Because people change, so do financial plans. Therefore don’t expect this plan to be written in stone. Instead expect to revise it as plans changes and new needs arise. A financial plan is dynamic and should change as life changes. Therefore do a regular check to make sure your goals are still the same and that the money intended for those goals are in the proper type of investment.
Back to
more information on investing
To teach and learn money skills, personal finance, money management, business,
careers, and life skills please go to the Money
Instructor home page.
