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.

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