June 18, 2020

Setting your financial goals is the first and most important step in the investment process. Here’s a handy guide you can use.

Setting financial goals is one of the hardest parts of the investment process. It’s an area that gets overlooked or downplayed by investors and their advisors alike, because it can be tedious, frustrating, and time consuming. Many financial professionals – brokers, advisors, planners – assume that you come to the table with your financial goals already figured out.

But what if you are stuck at this key point and can’t figure out how to move forward? How do you decide which goals are the most important and which ones can be postponed? Here’s a relatively simple way to get past the goal-setting hurdle.

First, take out a pad and pen (old school) or a Word document (new school) and make three columns – label the columns “Goal Name” “Short Term Goals” and “Long Term Goals.”

financial goal setting

The important part is to quantify each goal with a dollar amount. This will evolve over time, so don’t get hung up on being exact at this point.

Next, list the things you are saving for that you want to have before you retire. This may include a house (either your first house, or an upgrade to your dream home), a new car, a college fund for the kids, a big vacation, or that expensive toy you’ve been dreaming about having some day. These are your short term financial goals.

Your short term goals are funded by your taxable savings, as opposed to your tax-deferred 401(k) plan, IRA accounts, or pension plan at work. There’s no secret here, no magic formula to reveal. Just estimate the dollars you need, the date you will need it, and how much you need to save every month in order to make these short term goals happen.

I know it sounds overly simplistic, but most people – the vast majority of people – don’t even take these basic steps. By simply figuring out the cost, the time frame, and the monthly savings goal, you will be far ahead of the curve in reaching your short term goals than most of your friends and associates.

When it comes to deciding how to invest your short-term taxable money, you’re going to need some specific advice. Short term investments are inherently more risky than long term investments, so you will be doing yourself a great service by reading and understanding the ins and outs of risk identification and risk management. For a detailed discussion of these issues, become a Premium member to ZenInvestor.

Next, under the Long Term Goals column, list everything you can think of as it pertains to your retirement. There are other long term financial goals, like leaving a bunch of money to your kids, donating a wing at the local hospital, or establishing a scholarship in your name, but let’s focus on retirement because it’s the overwhelming long term goal of most investors.

Under Retirement, start with your ideal age when you retire. Be realistic, because most of us would like to retire at 40, and travel the world like free spirits. But 55, 60, or 65 are more realistic, and we try to operate in the land of reality on this website.

Once you have your retirement age, calculate the number of years you have until you reach it. This number becomes the key to setting up a savings and investing plan that will get you past the goal-setting hurdle. This number will guide you through the maze of choices about how to invest, and where to look for relevant investment advice.

For a detailed discussion about how much you should be saving, and what to invest those savings in, become a Premium member of ZenInvestor. This will unlock premium content that will guide you every step of the way in your journey to becoming a Master Investor.

About the author 

Erik Conley

Former head of equity trading, Northern Trust Bank, Chicago. Teacher, trainer, mentor, market historian, and perpetual student of all things related to the stock market and excellence in investing.

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