The Importance of Financial GoalsSubmitted by The Participant Effect on September 19th, 2016
We view goals as life’s destinations, whether it is where you want to be at the end of the day or at some point in the distant future. But there is a big difference between a clearly stated goal with a plan to achieve it, and a hope or a pipe dream that merely swirls around in your head. If a goal is not perceived as realistic or achievable, then it‘s nothing more than a hopeful aspiration without any real value. Goals need to be well-defined, quantified, and have real intrinsic value in order to inspire a thoughtfully conceived plan of action. Anything less, and it will remain a hope; and hope is not a strategy.
Generally, people without clearly defined goals, or who view the future with uncertainty, will lack the confidence necessary to adhere to a long-term strategy. Investment plans based on the hope that past performance will prevail in the future don’t engender confidence, nor does the notion of planning toward the accumulation of a capital need using arbitrary or out-dated rules and assumptions.
Time is of the essence with goal setting. The only resource available to us, over which we have some element of control, is time. However, it is a wasting resource if it is not optimally utilized. Each day that passes, without some contribution of money, either in savings or interest, the cost of your financial goals increases. As time marches on, the obstacles to achieving goals of any time horizon become increasingly insurmountable.
These are the obstacles we all face in trying to achieve our financial goals:
Diminishing Time Value
Most people have heard of the financial axiom, “the time value of money” that describes how the growth of money is primarily a function of the amount of time it is given to work. The less time that money has to work, the more it will cost to attain the goal which is also defined as “the cost of waiting.”
Risk as a Replacement for Time
The more time money has to work, the less it needs to grow. Given enough time, money will let compounding interest work its potentially reducing the need for higher returns and the greater risks associated with them. When it is necessary to assume greater risks in order to overcome the loss of time, financial goals can be jeopardized.
Inflation is one of time’s worst enemies. The longer the time horizon, the longer inflation can eat away at the true value of money. At a normal inflation rate of 3%, the purchasing power of money is cut in half after 23 years. The cost of financial goals must incorporate the cost of inflation when calculating how much savings will be required to achieve them.
Taxes are the one certainty of life that can obstruct your progress towards reaching your goals. The good news is that, with the proper planning, and the use of the right tools, they can be managed to help reduce their impact.
Yes, life happens, and very rarely in the way we anticipate, which is why financial goals must be defined, calculated, measured and reviewed frequently so that the necessary adjustments can be made to keep you on the right road when life throws you a curve.
In investment planning, your goals and objectives become your investment benchmarks, which are an absolute measure of your investment strategy’s performance. This allows you make investment decisions based on where you are in relation to your objectives rather than on market returns which are beyond your control. More importantly, it will shield you from the irrational behavior of the herd which is often driven by euphoria or panic.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies. Investing involves risks including possible loss of principal.