Sunday, September 14, 2008

Be Your own financial planner part 5 - Map our your financial goals

Many of the biggest financial events in your life are predictable.  As your own financial planner, it is your job to plan and prepare for them.

Your car will only last so long.  Your kids, if they go to college, will probably do so right after they graduate from high school.  If you are planning on moving to a larger house as your family grows, you probably have a good idea of when you want this to happen.  Events like these happen whether you plan for them or not.  However, they will be easier on your finances if you have planned for them.

Sit down and take a few minutes to think about the major financial expenses you expect to experience over the next five years.  And the next ten years.  And the next twenty years.  When do you think that you will need a new car?  Will your house need significant work at any point in time?  Do you need to save for a vacation?  College tuition?  Will you be moving or purchasing a second home?  Try to think of every specific major financial event in your life for which you can you plan.  Write down what the event is, how much you need to save, and how long you have to save.

The sooner you will need the money for your goal, the more conservative your investments should be.  If you will need the money in five years or less, I would recommend saving your money in a very stable investment such as a savings account, CD, or government bond.  If your goal is more than 15 years away, you almost certainly will want to allocate at least some of your savings for that goal into a stock fund.  For anything in between it's up to you.

More aggressive investments might help you reach your goal faster.  However, they can also tank at just the wrong moment and leave you short of funds.  If your timeframe and goal amount is flexible, you might want to be more aggressive than if your goal amount and time frame are set in stone.  For example, if you are setting aside money to purchase a new car, you might be able to delay your purchase by a few months or purchase a less expensive car than you had previously planned.  If, however, your goal is very specific, there might not be any room for the risk that more aggressive investments entail.

Once you have your goals and timeframes laid out, head over to this savings goal calculator.  Plug in the information about your goals (one at a time), your time period, any money already allocated for this goal, how much you can save every month, and your expected rate of return.  This calculator will then tell you how long it will take you to reach your goal and what amount you would need to save each month to hit your goal at the end of your designated time frame.

There are also a number of great specific college savings calculators.  The CNN Money College Savings Calculator is one of my favorites.

This exercise has helped you complete step six in your financial plan: Prepare for the major financial events in your life other than retirement.

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