| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
And how much to save? And how to invest it?Know Your Goals Successful marathoners start training months ahead. Whether its a short three-miler or an arduous 19-mile trek, they know that a weekly regimen over many months is the key to performance on one day that seems far away. The only way to build up the stamina needed to finish the race, they say, is to follow your weekly mileage schedule as though it were a religion. Financial goals require a similar approach. Just as running 26 miles six months from now can seem daunting, a 30-year financial plan with some pot-of-gold goal may seem outright impossible. The way to set and achieve financial goals is to focus less on a distant and intimidating figure than on what you can do this year, this month, or this day, to help yourself reach that target figure. As a financial planner for the past 35 years, Ive assisted many people in defining what they hope to accomplish financially. New clients inevitably feel theyre in a chicken-and-egg situation. They are holding down jobs, forging ahead in careers, and saving some money. But they dont quite know how to go about investing because they dont know what they will need in the future. Not knowing where they need to be lacking a targetsometimes they dont bother to invest at all. Financial independence is the single most common objective my clients seek. But how does one quantify that? The term means something different for everyone. For one person it might mean moving to Mexico to live off Social Security checks. Others aim to build up two or three million dollars so they can remain in their own home but volunteer full time for their favorite charity. Still others want to be able to put all their grandchildren through college. There is one common denominator that many long-term dreams share: It takes a good chunk of time to save and invest enough money in order to live without working, or at least without worrying. But how much time? And how much to save? And how to invest it? In an ideal world, 20-year-olds would sit down to figure out how much money they would need by the time they are 65 and then take precisely the steps necessary to reach that figure. They would know exactly how much they wanted to store up by the time they wanted to retire and how much they needed to invest in the short term to make it all happen. Then they would make it happen. As you and I know, life is a lot messier than that. If youre young and starting a career and/or family or are in the early stages of either or both, you probably have trouble finding the time for a movie, let alone a moment to plan out the rest of your financial life. Plus, you face many variables and uncertainties that make planning seem senseless. Or perhaps youre in your 40s or 50s and have a better sense for your future. But you may feel too constrained by your current fiscal responsibilities (the mortgage, childrens educations) to consider preparing for your own seemingly far-off future. Whatever your situation, none of us can afford to put off goal setting. And the task is not nearly so daunting as it seems. All good investing goals contain four key elements: (1) a certain time period over which you will invest and over which youll assume (2) a specified annual rate of return, with an eye toward reaching (3) a lump-sum goal by saving (4) a specified amount on a regular basis. This chapter discusses all four elements of goal-setting in sequence. Then Ill help you calculate your goals by breaking down the process. Element One: A Manageable Time Period The first element of a goal is choosing the proper time horizon. Just how many years out are you looking? As mentioned earlier in the Hayden Playbook, theres nothing my industry likes more than a good 30-year plan. Thats in part because long-term plans can smooth out the wrinkles of the markets while allowing the wonder of compounding interest to boost projections. Its also because ideally it would be nice if everyone sat down and figured out where they reasonably hoped to end up financially and then took steps every year to get there. The multidecade concept, however, can be paralyzing. Its too hard for many to form a vision of where they want to be 30 years in the future. Intimidated, they dont planor investat all. To overcome this inertia, I suggest setting more manageable time-related goals. This means crafting short-term goals within 30-year plans where possible, or, if 30-year plans are just too tough, simply relying on short-term goals. How short is short-term? About five years. Anything less than five years, and a goal might be more appropriately considered a budgeting exercise because it is less proactive about investing and more about how much you can save. Still, many times savings goals are the initial steps that youll need to take to set yourself up to establish investing goals. Either way, as long as the targets are precise and realistic, theyre keepers. And in all cases, my clients and I return to the here and now to set concrete challenges comprised of monthly and annual investing benchmarks. This is crucial because the present is the only time you can actually save and invest. Hayden Play: Plan short term for the long term. The financial planning profession loves a 30-year plan. But the prospect can be so daunting that it prompts people to give up any hope of planning at all. Avoid paralysis by breaking up your projections into time periods that are manageable for you. A solid five-year plan can be extremely effective. It guides and encourages you to act nowand now is the only time that you can invest money for the future. Now is when you should start to set goals. But so often people put off planning until their lives are more settled. When is life ever really settled? If you want to wait until things settle down before you plan, youll never plan. The conundrum brings to mind a young doctor who arrived at my office many years ago. The doctor, now one of this countrys leading melanoma cancer experts, was starting his own private practice. The 37-year-old was certain that he wanted to be financially independent in 30 years. And he was pretty certain he wanted to be living somewhere on the Monterey Peninsula, south of San Francisco. That was all we knew for sure. He didnt know what kind of salary he could hope to draw, how high his overhead would be, or who his patients would be. He didnt know how much money he would need to be financially independent. So, in about the time it takes to plan a two-week river rafting trip, we started putting together a story about what his future financial life might look like. This was in 1972. We made all kinds of assumptions and guesses about this future: how much money he would make, how much his expenses would be, and how much money would be left over to invest. We decided we could realistically shoot for a goal of an 8 percent annual return on investments because, based on historical data, it seemed like a reasonable return for a combination of all kinds of investments, including real estate. (Of course, any such return is not guaranteed. More about realistic returns later in this chapter.) Since we didnt know how much money he would actually be earning in salary, we left the amount to be invested to be determined annually. Over the years his earnings rose and we tweaked the annual investment amount upward. With taxlaw changes and market shifts, we made adjustments in our investing targets along the way. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |