SETTING YOUR GOALS

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SETTING YOUR GOALS

Published by sam - 07/11/07 - 05:11:15 am

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If you have a savings account, a life insurance policy, or a will, you have, in fact, done some financial planning, because all of these items are future-oriented. The first makes possible your plans for future spending, and the last two protect you against future contingencies. Once you understand this, you can see that financial planning is simply a more detailed and more systematic version of what you have already begun.

Anticipating Change

One of the limitations of an annual budget is that it may temp you to believe that your current pattern of spending will continue almost indefinitely, even though the actual dollar amounts will change. This belief is totally misguided, because over the years your needs and wants, as well as your discretionary income, are likely to change.
At the age 30, if you have dependents, you need enough life insurance to support them to maturity. At the age 60, you usually need less because your children are more self-sufficient and your other assets have probably increased.
At the age 35, because your increasing income may be taking care of your routine expenses, you may choose to invest in growth stocks in hope that they will increase in value by the time you retire. At the age 60, with you earned income less likely to increase sharply, you will probably prefer safer investments that yield generous dividends rather than those that promise growth.

At the age of 35, you may have to forgo travel and other recreation to meet your mortgage payments and to provide for your children’s education. At the age 60, however, your mortgage payments might have terminated, your children’s education will probably have been paid for, and you may take a profit by selling more on travel and recreation, and you may have to prepare to meet higher medical costs.

At the age 25, a spouse may leave the work force to bear or rear children, and the family budget will need to be readjusted for the loss of one income. At age 40, the spouse may return to work, once again in requiring a revision of the budget.

Although the examples we have cited and the actions suggested in this table are fairly typical, none of them is preordained, and you own life experiences and family circumstances may follow a very different pattern. Your course may, for example, be disrupted by divorce or other changes in family structure, by a drop in earnings in middle age instead of the typical gradual increase, by a child’s continuing dependence into adulthood, and by other unpredictable events. For such reasons, your plan should be as specific as possible for the first three years, more general for the next five or ten, and still more tentative as it proceeds further into the future. But is should at all times reflect your personal goals and values, even if they differ radically from those of your friends or neighbors. Your aim, after all, is not just to be able to pay your bills but to have your bills represent goods and services that give you satisfaction and pleasure.

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November 7, 2007 | Financial Planning |

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