Before you invest your hard earned cash into the market, you need to identify what your financial goals are. Let’s learn how to properly set your financial goals.
Before anything, goals
Successful people in life set goals and meet them (hopefully, they exceed them).
Goals are important because they force us to define what type of future we’d like to see for ourselves.
They force us to take concrete steps now, so that we get where we need to be later.
Who doesn’t want that?
Goals as landmarks
Think of goals as signposts along the roadmap of your financial life.
Financial goals help us decide where to go, what to do and almost more importantly: what not to do along the way.
Assumptions matter
Because there’s so much uncertainty about forecasting the future (ask any weatherman), we need to make assumptions about lots of things when we plan, like how much we’ll save and how much our money will grow if we invest it.
Because our goals are so important (retiring with enough money, saving for college), getting these assumptions right is critical.
If we’re way off with our assumptions, we may not meet our goals.
That’s what this course is all about.
What’s ahead
In the next 6 steps, we’ll give you the tools to
- set your financial goals
- gauge whether you’re on track to meet them
- adjust your behavior to make hitting your goals a lot more likely
Make time work for you
How do you use your time?
Are you a go-getter, aggressively getting what you want?
Or, are you more zen-like, taking things that come your way and making the best of them?
Time is funny – it has the ability to accentuate small differences and make them into larger ones. It can also blend away differences, bringing two different things closer into the future.
Time: Our friend and enemy
When we think about financial planning, time can work for — or against — us.
Look at time as your frenemy: if used correctly, it will help us reach our goals. If ignored, though, time can make things quite unpleasant.
Key point: Time impacts our personal finances by giving our savings and investments more chances to grow. It enables us to save more and provides the fuel for our investments’ growth engine.
Two clear examples of how time can impact our finances
- Biebs, a diligent saver: Biebs makes a good salary and he’s diligent about saving it. He adds $10,000 a year to his retirement account. He starts at age 28 and does that for the next 40 years. Assuming the money grows at a conservative 5%, Biebs ends up with almost $1.3 million as he enters into retirement. (Source: MoneyChimp).
- Lindsey L, thinks only of today: Lindsey is very different from Biebs. She likes to party. Though she also makes a good living, she only begins to save when she reaches 38. She also stashes away $10k a year. Our party girl ‘only’ ends up with about $700,000 — practically half of what Biebs gets.
So, you see just how important starting early is to give your money tree more time to grow. Nourish your money tree with consistent additions to your savings over a long period of time.
Let’s talk about your career
Having the conversation about how much money you make is important in 2 real ways:
- It will help us forecast how much money you could save
- It will also help us estimate how much money you might need
Is your income leaking money?
Saving money is an important (maybe the MOST important) part of financial goal setting.
In fact, it’s the only thing under our control (we can’t control how well the markets perform).
So, part of your monthly or annual salary should really be siphoned off, into a long-term investing account. By knowing how much you make and how much you save, we can begin to calculate how much money you’ll have in the future.
How much money do I need?
One of the side-effects of setting and reaching financial goals is that our stress levels go down, the panic that we may run out of money subsides.
But how much money will you need?
When you enter retirement, most people find that their spending goes down — at least, that’s the assumption anyway.
One quick-and-dirty way to figuring out how much money you’ll spend in retirement is:
- take your current income (assuming we all spend most of it)
- give it a haircut to about 75-80% of your income
- that’s how much you’ll need in retirement
Figure out how long you’ll work
People are living longer and finding second and even third careers, as they enter into their 60s and 70s.
Working longer is a really good thing for your financial goals. Why?
- it gives you more time to save
- it gives your investments more time to grow
- it delays tapping into your retirement fund
While it’s not always possible to continue at your current job as you age, that doesn’t mean you can’t find a way to make money off a hobby or retrain for a new career.
Invest your way to a successful retirement
Given what you’ve just learned about yourself, you may be feeling confident right now or you may be feeling a bit nervous.
That’s OK — we have a lot in our control to better our chances of meeting our financial goals.
Investing a key tool in our investment toolbox to grow our money, helping ensure we meet (and hopefully, exceed) our financial goals.
Simply, investing
Put simply, investing is buying something we believe will be worth more in the future than it’s worth today.
For us, we’ll be focusing on investing in the stock market because it’s the easiest, cheapest, fastest way to start growing our money.
Question: How much should I expect to make in the stock market?
Answer: Over the long run, the stock market averages about 10% per year plus or minus after you account for inflation (which lowers performance).
Get better returns by investing in different things
One easy way to improve our investment returns is merely by investing in a variety of different types of stocks:
- large companies and small companies
- companies that are in the business of precious metals and commodities
- real estate
- U.S. firms and those based around the world
Diversifying your way to success
By investing in different types of things, you accomplish a couple of different things
- Protect your portfolio: investments go up and down according to cycles. By investing in different asset classes (that’s what they’re called), you balance your portfolio — as one thing goes down, others go up.
- Make more money: By investing in different things, your portfolio fluctuates less over the course of time, your portfolio actually performs better.
Change things up as you get older
As investors get older and approach retirement, they typically take their money out of the stock market and invest it in things that are more stable.
That’s because, their ability to stomach losses (and the stock market is a roller-coaster sometimes) diminishes as they become more dependent on their retirement accounts.
Get started on your financial goals
We just created a basic financial plan together.
That wasn’t too painful, was it?
With this information in hand and an understanding of how important planning is to reaching your financial goals, you’re ready to conquer the world…
…or at least start learning some more.