We are a materialistic society. For many people, "fun" revolves around spending money in one way or another. We're looking for immediate gratification, and we're willing to tap any available source--credit cards, home equity lines of credit, retirement plans, and so forth--to get it. Unfortunately, this type of behavior can get us in trouble. Bills we can't pay. Credit-card debt that may take years to pay off. You don't have to be a financial genius to see that there has to be a better, smarter way. Our school systems should teach kids about setting financial goals and calculating how much to save to reach those goals. This is a basic life skill, and everybody should know how to do it. Sorting Your Goals by Time Horizon
Almost everybody has financial goals. They can be longer-term goals like sending your kids to college or having enough money to eventually retire. Or they can be shorter-term, such as buying a new car or taking a trip to Costa Rica. Whatever you're dreaming about, it probably comes with a price tag. Start by writing down everything you want that costs money. The decisions you make about how to save and invest will be driven in part by how long you have to reach your goals. Take the goals you've identified above and sort them by time horizon. Prioritizing Competing Goals
Some financial goals may be more important to you than others. For example, while you may need a new car in the near future, you may feel that your child's college fund is even more important. Most of you will have multiple, competing goals. Crunching the Numbers
There are many helpful calculators available online that can help you figure out the total costs for different goals. Let's go through some examples together so you get the idea. Goal: College for 6-year-old daughter
Time Horizon: 12 years
Price Tag: $12,000 a year for four years
Using a college savings calculator at Choose to Save, I entered the above information plus a 7% investment rate of return, a 6% inflation rate for tuition (it's higher than the general inflation rate), a federal tax rate of 28%, and a state tax rate of 3%. The results show that I'd need to save about $440 a month to reach this goal. (Most of you can ignore the other two results: The rate of return is wildly optimistic, and most of you won't be able to put away a lump sum today.) Goal: Trip to Costa Rica
Time Horizon: 1 year
Price Tag: $2,500
This time I used a savings calculator at Choose to Save. I entered that I need $2,500 in 12 months and that I plan to save $100 a month initially. My investment rate of return is 5%, and my tax information is the same as above. The results show that I need to increase my monthly savings to about $200 a month. Goal: Retire at 62
Time Horizon: 12 years
Price Tag: $1.7 million
Using Vanguard's retirement calculator, I entered these inputs: - Annual income: $100,000
- Percent of income needed in retirement: 90%
- Social Security estimate: $23,500
- Pension: $0
- Savings balance: $360,000
- Annual retirement savings: $20,000
- Investment return: 8%
- Years until retirement: 12
- Years in retirement: 25
Results show I'll need to increase what I'm currently saving to $2,800 a month. (If any of these monthly savings goals is just too much, start with a smaller amount and work toward this goal.) Investing for Your Goals
Now that you've got a better idea of how much you need to save each month to meet your goals, let's think about how you should invest that money. The shorter the time horizon for the goal, the safer the investment should be. For goals for which you expect to pay within the next year, money markets or CDs will probably be your best bet. You'll probably earn in the 4%-5% range on your savings. For goals for which you expect to pay within the next one to three years, you still shouldn't invest much in the stock market. With a balanced fund you can expect to earn about 6%-8%. For goals for which you expect to pay within the next three to 10 years, you'll probably still want a balanced portfolio. If you are at the long end of this range, you may want to tilt your portfolio toward growth--maybe 60%-65% stocks, 35%-40% cash and bonds. For goals for which you expect to pay longer than 10 years from now, you can afford to invest more in stocks. But your risk tolerance will dictate just how much of your portfolio you'll feel comfortable investing in stocks. As you get closer to your goal, you'll need to adjust your investment mix so that less is at risk in the stock market. Now that you know how much to save, treat that amount as another bill you pay each month. And remember, don't get so caught up in buying things that you don't enjoy the simple things that life has to offer, too. A version of this article appeared Aug. 10, 2006. | 
