How to Set Financial Goals

You probably don't expect to attain great wealth in your lifetime. Simple financial security would do, if only you knew what that meant. It's a slippery notion, all right, but it does have a few characteristics you can grasp.

You need a steady source of income. This comes from your job, or your business if you're self-employed, or investments if you're fortunate and alert. Future income is the bedrock on which financial security is built.

You need financial reserves. Cars break down, household appliances wear out, roofs spring leaks. Kids aspire to college educations, and someday you'll want to retire. These are expenses you have to provide for with savings and investments.

You need protection against financial catastrophes. In a word, this means insurance. You need it in sufficient amounts to cover your life, your health, your ability to earn an income, and your family and your possessions. Without insurance, the best-laid financial plans can be wiped out in an instant.

You need to get further ahead each year. If you stand pat, even modest inflation will grind away at your financial reserves just as surely as if you were spending the money. To stay ahead of the cost of living, you have to be alert for opportunities to make your money grow. These things don't come to you by accident. You have to go after them, and that means setting some goals.

The most important step toward financial security is to translate it into your own terms. What, exactly, are your personal financial goals? If you have trouble sorting them out, try classifying them as either wants or needs. Go a step further and add long-term or short-term to the description. Now you have some useful labels you can apply to your priorities.

Say you're going to need a new car soon. Gathering the money for a down payment without borrowing or dipping into savings would be a short-term need. Let's call it, and other short-term needs such as your daughter's braces or a new winter coat, priority number one. Longer-term needs, such as contributions to a retirement fund, can get priority two. That vacation in Bermuda next spring is a short-term want -- making it priority three. The 42-foot sailboat you'd like to own before too many years go by is a long-term want, so it gets a four.

You could shift priorities around, of course, and use lots more numbers. Actual goals and their priorities will vary with your circumstances. The important thing is to give serious thought to your goals and try to anticipate the expenses coming up, whether they're close at hand or several years away.

Choose goals you can get excited about because that will make you more determined to reach them. "Financial security" sounds good, for instance, but we've already admitted that it's hard to quantify. It needs some skin and bones. Define what it means to you. How about this? "I want to own a million dollars' worth of stocks by the time I'm 50." Or this: "We want to retire to Arizona in ten years with enough money to buy a house near Phoenix and enough income to travel in Europe for a month each year." Now you've got goals you can put a future price on, and that price can be translated into a savings and investment plan that you can start today. Put your goals in writing; that makes for a great motivational tool.

The trouble is, exciting goals and good intentions need cash to back them up. That's where budgeting comes in. It's your best bet for distributing your limited resources among competing goals.

Adapted from Kiplinger's Practical Guide to Your Money, by the editors of Kiplinger's Personal Finance magazine (Kaplan Publishing. Copyright 2005 The Kiplinger Washington Editors, Inc.) Available wherever books are sold or direct at kiplinger.com/store/books.