Money Essentials

Identifying financial goals

You probably won't achieve every financial goal. But you can go further than you think.

What are your top three financial objectives?

Most people, when asked that question, answer with general goals, such as achieving financial security.

The fact is, many of us haven't thought much about which financial objectives really matter most. Instead, we muddle through our financial lives, spending to meet the day-to-day expenses that dominate our attention.

That approach risks leaving your most important objectives unfulfilled.

That's what this lesson is all about: helping you identify the financial goals that matter most to you and making sure they happen.

That's not as easy as it sounds, since financial goals continually collide with one another. Paying for a child's braces may rob money that would otherwise go into his college fund, for example. And saving effectively for your kids' college can wipe out any hope of putting aside adequate money for your own retirement.

That's why to get what you want most you must 1) decide which goals will take priority and 2) work toward the lesser goals only after the really important ones are well provided for.

Fortunately, you have at least one ally in meeting your long-range goals: time. That's an advantage because of the power of compounding - the fact that even a small amount of money can earn interest, and that each year that interest gets applied to a growing sum of money.

Suppose, for example, you put aside only the cost of a single candy bar - about 65 cents - each day. Invested in a tax-deferred account paying 5% a year compounded monthly, that string of savings would grow to $3,073 in just 10 years and to $16,470 in 30 years.

For other examples of the way that money can grow over time, try's Savings Calculator.

To put the power of compounding on your side, you have to start early. Suppose there are two siblings who both invest in Individual Retirement Accounts earning 8% a year.

The sister starts at age 20, and for the next 10 years she stuffs $3,000 a year into her IRA. At age 30, though, she stops and never adds another penny.

Her brother waits until age 30 to get started, but then dutifully salts away $3,000 a year for the rest of his life. Which sibling do you think will be better off?

In this case, the early bird will always be ahead. The sister reaches age 65 with more than $642,000, while her brother will have a little under $518,000 - about 20% less.

Of course, it's far better to start early AND keep it up. If both siblings started saving $3,000 a year in an IRA at 20, and kept it up until retirement, each would end up with nearly $1.2 million.

The point is that to put time on your side, you need to decide early which of the many possible financial goals are really worth pursuing - and start working toward them.

To get started, make a list of all the things that you'd need to feel secure, happy or fulfilled. These can range from the weighty (getting out of debt) to the luxurious (a Lamborghini). You don't need to prioritize them yet.

But you should try to put down all of the money-related things that will really get your motor started. And if you have a spouse or significant other, do this exercise together! Here are some common goals you may want to consider:

- Accumulating enough savings to handle an emergency situation

- Buying a house

- Getting out of debt - and staying out

- Ensuring that your parents are comfortable and well taken care of in their old age

- Paying for your children's college education

- Amassing enough wealth to retire comfortably

Once you have your list in hand, push on to the next section, where you'll determine which of these goals are most important to you.

The prioritizer
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Updated 7/9/2012 with content changes - aross