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Educational Programming Video

The Value Line Mutual Fund Survey
Program 14: Financial Planning Part 3

In this session we'll continue to discuss financial planning.

Last session we discussed four broad categories that investors fall into: early years, family years, pre-retirement, and retirement. Each phase is very different and it is likely that your goals will change as you move through each one. Right now, however, you should only consider the category that is the best fit for your current situation.

Figure out what specific goals you want to achieve. In the early years it may be as simple as affording a new car and hoping to retire at 65 with a million dollars. For a person in the family years, goals might include sending a child to college, buying a house, and retiring with a million dollars. The point we're trying to make is that goals and time frames go hand in hand. In each example above, the first goal or two are short term and the last is long term. Obviously having a million dollars becomes a near-term goal as you grow older, but for now think of it as a long-term goal.

So, the next step in goal setting is breaking your goals into three categories: long-term, intermediate-term, and short-term. Each one of these time frames needs to be handled in a different way.

Short-term goals are pressing things that need to happen in the next three- to five-years. A down payment for a house or a new car is a good example of a near-term goal. It is not appropriate to consider long-term investments for these types of goals. The stock market and bond market can be very volatile over short periods of time. If you need the money soon, you don't want to have to sell your investments at a loss. You are better off purchasing a certificate of deposit (or CD) from your bank or opening a money market account. These products offer higher yields than bank accounts and are very secure. In fact, CDs are government insured. With these savings tools, you know that your money will be there when you need it.

Intermediate goals allow you a little more room. Perhaps you have just had a child and want to start saving for her education. Putting a little bit away on a regular basis will ease the sting in 18 years when she starts attending an expensive Ivy League school. Intermediate goals are generally 5- to 10- years out, maybe even as long as 15-years depending on the situation. With this much time, investing in stocks makes sense. A diversified portfolio, with a slightly conservative bent is probably best for shorter periods, say 5- to 10-years, while it is appropriate to be more aggressive for any goals over 10-years.

Long-term goals can be the easiest to reach, but the hardest to start saving for. We tend to procrastinate when events are too far out on the horizon, instead focusing on today. So a goal that is 15 years away or longer may not seem important. Don't be blinded by today, start saving early.

As with our hypothetical daughter and her Ivy League school, a little bit every month goes a long way. And, with long-term goals, you can afford to be very aggressive with your investments. You might allocate a significant portion of your assets to technology or healthcare, trying to highlight areas that are likely to experience strong growth.

Now that you have all of your goals broken out by time, try to figure out how much money you will need to meet each goal. An Ivy League education is costly today, what will it be in 18 years? How large a house do you want? How much money will you really need in retirement? Plot down some numbers for what things cost today, and then visit the web. Value Line's financial goals calculators can help you figure out what things will cost in the future. Now review your time frames, your starting point, and your expected costs. Are your goals still feasible?

If you have no money saved today and will need $50,000 in three years for the down payment for a house, can you really afford to save enough money for the down payment? Maybe you will need to consider a smaller home or wait a bit longer before you buy one?

Also, what other goals would you have to push aside to save more for a near-term goal? What goals are you willing to push aside? Are you putting your long-term goals in jeopardy for a less important goal? If saving for one goal means no money goes to another, you need to rethink your goal and its time frame. Maybe you really can't reach all of your goals. Weed out goals that aren't feasible.

Also consider setting up intermediate milestones. It is more important to have goals in place, but milestones can help you figure out how close you are to a goal and, more importantly, can help you keep motivated. It's easy to loose sight of long-term goals, remember that it's the little steps that help you get there.

Once you really finalize your goals you are ready for the next step, figuring out how to get from your starting point to where you want to end up. We'll start discussing that topic next.

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