Personal Financial Planning: A "How-To" Guide (part 3)

Types of Financial Goals

by

Charles Lamson

Financial goals cover a wide range of financial desires---from controlling living expenses to meeting retirement needs, from setting up a savings and investment program to minimizing the amount of taxes you pay. Other important financial goals include having enough money to live as well as possible now, being financially independent, sending children to college, and providing for retirement.

Financial goals should be defined as specifically as possible. Saying that you want to save money next year is not a  specific goal. How much do you want to save, and for what purpose? A goal such as  "save 10 percent of my take-home pay each month to start an investment program" states clearly what you want to do and why.

Because they form the basis for your financial plans, your goals should be realistic and attainable. If you set your savings goals too high---for example, 25 percent of your take-home pay when your basic living expenses already account for 85 percent of your take-home pay---your goal is unattainable and there is no way to meet it. But if savings goals are set too low you may not accumulate enough for a meaningful investment program. If your goals are "pipe dreams," they will put the basic integrity of your financial plan at risk and be a source of ongoing financial frustration. You must also use realistic assumptions when setting goals. Exhibit 1 will help you do a reality checkup.

It is important to involve your immediate family in the goal-setting process. When family members "buy into" the goals, it eliminates the potential for future conflicts and improves the family's chances for financial success. Once you define and approve your goals, you can prepare appropriate cash budgets. Finally, you should assign priorities and a time frame to financial goals. Are they short term goals for the next year, or intermediate or long-term goals, not to be realized for many more years? For example, saving for a vacation might be a medium-priority short-term goal, whereas buying a larger home may be a high-priority intermediate-term goal, and purchasing a vacation home a low-priority long-term goal. Normally, long-term financial goals are set first, followed by a series of corresponding short- and intermediate-term goals. Your goals will continue to change with your life situation, as Exhibit 2 demonstrates.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 14-16*

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