Financial Literacy - Financial tuneup
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Use investments to reach your goals

Many people go about investing in sporadic fashion, without considering their goals, time horizon or risk tolerance. They put together a thousand bucks, call a broker and ask for a stock recommendation. Or they sign up for 401(k) plans -- a good thing -- but plan to tap them early without realizing they'll have to pay stiff penalties plus taxes to do so. Still others dutifully open accounts and invest without truly examining why. And dreams? For many, dreams are for those rare moments of reverie and don't even enter the process.

Figure out your dreams, goals

Instead of following a financial formula and then seeing if it makes sense to pursue your dreams, you should work from the other direction, says life-planning pioneer George Kinder, author of "Seven Stages of Money Maturity" and founder of the Kinder Institute of Life Planning. First determine your dreams, then use financial planning to help you get there.

Use this work sheet to help you determine your goals.

Fine-tuning your investments:
  1. Figure out your dreams, goals
  2. Balance multiple objectives
  3. Consider your time line
  4. Invest for your time horizon
  5. Determine your risk tolerance
It's important to explore even those desires you wouldn't normally consider discussing with a financial planner. Whether you want to spend more time with your family, play the guitar like Eric Clapton or learn to fly a plane, you'll need to figure out how to free up the resources -- the financial and time components. After all, time is money.

"Write down five to 10 financial objectives," says John Grable, professor in personal finance planning at Kansas State University. "It's unlikely you'll be able to fund them all unless you're very rich. What you've got to do is determine what's important to you and then prioritize meeting the goals."

Balance multiple objectives

It's not all about the pie in the sky.

"Out of your dreams, do some realistic goal setting," recommends Richard Salmen, Certified Financial Planner and national president of the Financial Planning Association. "If your goal is to save up for a down payment on a $240,000 house, you'll need to save $800 per month for the next five years in order to reach it," he says. "Start with the big picture at the end and work backwards to achieve it."

It may be necessary to adjust your goals. Salmen tells the story of one couple who dreamed of buying a ranch in Montana, but after looking at prices and income realized they wouldn't be young enough to enjoy their dream by the time they could afford it. They settled on a smaller farm outside of Kansas City instead.

"Now they have a baby with Down syndrome and they had to readjust again," he says. "'Life happens as you're planning it,' is our favorite saying around here. Planning is a process, not a product."

Use this calculator to run the numbers and see how much you need to invest or save to achieve your goals.

Consider your time line

Another piece of the puzzle is your time horizon. Some goals come with a set time frame, such as education.

"Once you have a baby you know you have 18 years until the first year of college hits," says Shashin Shah, a Chartered Financial Analyst, Certified Financial Planner and president of SGS Wealth Management in Dallas.

Other goals don't have an expiration date, but can depend instead on your financial wherewithal: when to retire, for example, or moving into a bigger house.

"If someone starts with nothing at 35 and wants to retire at 50, they'll either need to achieve a 20 percent return on their investments, work longer or back off their goal savings amount," he says. "They'll need to find out what they are willing to do to achieve their goals."

You don't want investments to get eaten up by taxes, but before funneling every extra penny into tax-deferred investments such as a 401(k) plan or IRA, consider carefully if you might need the money for some other purpose before retirement. Otherwise, you'll feel the bite of penalties.


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