Set Your Investing Goals
Once you've compiled a current financial snapshot and gained a good understanding of how you handle your money, it's time to take the next step along the path. Now that you know where you stand, you can figure where you want to go. It's time to set your investing goals.
First, make your goals specific and measurable. Don't say you want to save more; say you want to save $1,000 over the next twelve months. Instead of dreaming about some far off retirement on a tropical island, set a goal to retire with $6 million when you're sixty-five. With goals like these, you can mark your progress and make adjustments as necessary to help you hit your targets.
When you set your financial goals, remember to take inflation into account. Historically, inflation has averaged about 3 percent annually, but over the past few years it's skated higher (and it doesn't look to be heading back down any time soon). Some items inflate much faster, like college tuition, which has gone up by 8 percent a year.
The second rule is to allow for the unexpected, a critical part of every investment plan. Your car may break down, your hot water heater may stop working (probably while you're in the shower), or you might need a trip to the ER. All of these events take you by surprise, and they all cost money — money you were expecting to use in different ways, and probably at different times. To deal with unexpected expenditures, you'll need to have some easily accessible cash — but that doesn't mean uninvested cash. By planning for the unexpected and keeping some of your investment assets highly liquid, you'll be able to deal with situations like these without veering too far off your goal path. Remember, the reverse can happen, too. Whenever you get your hands on extra cash — like a pay raise, a bonus, or a loan finally paid off — use it to pay down debt or add to savings and investments. Extra cash is money you weren't counting on. You won't miss it, so use it to move you closer to your goals.
Make sure to include your expected retirement needs. If your lifestyle will tone down, some advisors figure you'll need about 60 to 70 percent of your current income. For more intricate calculations — like the potential effects of inflation and investment returns — check in with a financial planner, or try some retirement planning software.
Assess your current savings stage and plan your holdings accordingly. The further you are from your goal's timeline, the more risks you can afford to take with your investments. The key to all of this: Start saving money now.
Finally, design a preliminary investment plan that will move you toward meeting your financial goals. It can take time to refine and perfect your plan, but a basic model (such as the age method, where you convert your age to a percentage and invest that portion of your holdings in bonds and cash and the rest in stocks) is a good place to start. While your first instinct may be to take a chunk of cash and buy a hot stock, that probably isn't the best way to get where you want to go. Impulse investing, like impulse buying, can drain your money without giving you anything in return. So start with a basic plan until you gain some more knowledge and experience, or hire a professional to help you. Then, while your money is already beginning to work for you, you can take the time to plan an appropriate portfolio specific to your goals and timeline. That is the way to build your fortune and keep it intact.
