To get where you want to go in life, it is important to decide in advance how you will get there. Goals are signposts on the highway to the future. They serve as your guide to personal, career, and financial success. By keeping specific goals in view, you can direct your energies toward achieving your goals.
Financial goals are important because they help us to organize and direct our financial lives, providing a framework for decision-making. They can help us cope, provide some control in an environment where many things seem out of control, and help us visualize our financial future.
How can you establish financial goals and utilize the building blocks you need to achieve your dreams? First, you can learn how to create SMART goals. SMART financial goals have several important criteria:
Take the time to put your goals in writing. Putting them on paper will reinforce their significance. Use the worksheet “SMART Financial Goal-Setting” to help you list short-term (less than 3 months), intermediate-term (3 to 6 months), and long-term (one year or longer) financial goals. Then, to stay motivated, visualize how you will feel when you accomplish your goals. Lastly, it is very important that you periodically set aside a pre-determined sum of money for each specific financial goal.
When is the best time to stop a growing debt burden? Before it gets out of hand, of course. You can spot a debt problem early by looking at indicators, such as the number of bills coming in each month. Is the number increasing steadily? This could signal an increasing reliance on the use of credit. Cut back on credit buying now; you will be ahead of the game. Are you consistently paying only the minimum each month on your credit cards or other debts? This habit can be a critical “red flag.” If you can pay only the minimum now, do not increase your debt load. Also, keep in mind that, when you pay only the minimum amount each month, you are paying high finance charges on the unpaid balance. This costs money and delays the achievement of financial goals.
Periodically, get a copy of your credit report and check it for accuracy and completeness. This is especially important before making large purchases where you plan to use credit, such as for a car loan or a mortgage. In many cases credit reports have minor inaccuracies that need to be corrected. Sometimes there are errors that might result in your being turned down for a loan (to correct an incorrect credit report, use the form provided by the credit reporting agency). Visit www.annualcreditreport.comor call 877-322-8228 to request a free credit report each year from each of the three major credit bureaus (Experian, Equifax, and TransUnion). If you have recently been denied credit, employment, insurance, or rental housing based on information contained in your credit report, you are entitled to a copy free of charge from the company that issued the report on which the credit denial was based. You can also check your credit score online at www.myfico.com, www.equifax.com and www.eloan.com.
Credit management strategies can be used to:
If you have large credit card balances, it is a good idea to repay them before starting an investment plan. Repaying your debts can often provide a greater return on monies than many investment strategies. Repaying high interest rate loans can also provide money that can be used for future investments.
Home ownership is a financial goal for many people. A home is often the largest investment, and sometimes the only investment, that many people make. Given the low appreciation rate of real estate in some areas, it is probably better to think of purchasing a home as buying shelter, not as an investment that you expect to rapidly appreciate (increase in value). Home equity, the dollar value of a home in excess of the mortgage owed on it, is considered an asset against which you can borrow. This strategy must be used with extreme caution, however; you could lose your home if you do not repay the amount borrowed.
You don’t have to be a big-time, high-income investor to have an investment plan. Even if you have only a small savings account, investments can become part of a long-term strategy to achieve specific goals.
A diversified investment portfolio can be developed after building the blocks of a firm financial foundation. Until adequate cash management, an emergency fund, insurance plans, tax management, and credit usage are under control and functioning effectively, it is probably unwise to begin an aggressive investment program.
A diversified investment plan begins with a well-defined philosophy and encompasses strategies designed to specifically accomplish financial goals (e.g., children’s education and funding retirement) without having to sacrifice one goal for the other.
Are you planning to provide your child or children with a college education? If so, do you know how much it will cost? Do you know how you will finance this goal?
Meeting the financial costs of educating children is a financial goal for many people. The strategies to help you meet this goal may differ from other saving and investment strategies, however. Always investigate the tax and financial aid implications of your college-saving strategies.
The earlier you start planning for a college education for your child, the more time you will have to accumulate funds. Consider and plan for the cost of the entire college education. However, because saving ahead for the total cost may be unrealistic for parents, other possibilities need to be explored, including scholarships, grants, loans, and work-study programs. Learn the details about each one.
Planning for retirement is a challenge for everyone. Again, the earlier you begin, the longer you will have to accumulate funds and capitalize on compound interest. A plan designed to meet specific retirement goals may be separate from or part of the investment building block.
Some people have given a great deal of thought to retirement, but others have not. Less than half of working Americans or their spouses make retirement savings calculations, according to annual Retirement Confidence Surveys conducted by the Employee Benefit Research Institute (EBRI). Most experts believe that regular, systematic savings is a habit that is best established early and maintained, not only throughout the working years, but into the early stages of retirement since people are living much longer. Today, many people spend as many years in retirement as they spent in the workforce.
Financial experts have long described sources of retirement income as the three-legged stool: Social Security, company pension, and personal savings. Now with the growing concern over the future of Social Security, the reduction in benefits offered by employers, and the low personal savings rate, many see the three legs of the retirement income stool becoming shaky. Many say that the stool may need a fourth leg—paid work after retirement.
Now that the Social Security Administration has phased in automatic mailing of Personal Earnings and Benefit Estimate Statements to all wage earners, check yours for accuracy. It contains information that provides an excellent basis for retirement planning. Contact the Social Security Administration. Call 1-800-772-1213 or visit the Social Security Online Web Site www.socialsecurity.gov to obtain a benefit request form.
Another source of retirement information is your employer’s personnel department which may have general tips on retirement as well as specific information about investments available in your pension plan. Many online sites provide information about retirement planning.