It's never too early to set long-term financial goals

THE BALTIMORE SUN

Maybe you've seen it. A poster that says: "If you don't know where you're going you may end up somewhere else."

The message on that poster could very well have been written about handling personal finances.

Joe and Martha Smith, who asked that their real names not be used, say they are a perfect example of a couple who drifted along financially. Now, at ages 65 and 59, they wish they had managed better, wish they had set some financial goals and stuck to them when they were younger so that they would be better off today.

Joe is retired from a 25-year career as a supervisor in a lumberyard. Martha was a child-care provider who kept two to three children in her home while their parents worked.

"Our biggest mistake was that we didn't ever think about where the money was going to come from when I couldn't work," Joe said. "We always lived with the notion that the future would take care of itself. So we spent everything we made."

And, although they say they had fun doing it, now they are paying the piper. What the Smiths have discovered is that Joe's pension and Social Security benefits don't provide enough money for them to continue the same lifestyle they had before he retired.

Martha has cut out the weekly visit to the hairdresser. Joe has cut down on the number of cigarettes he smokes. They have let their subscription to a newspaper lapse. They give the grandchildren less-expensive birthday gifts.

The Smiths aren't unusual. Many people have trouble taking control of their money. It slips through their fingers like water through a sieve, said Jayne Gunter, a certified public accountant with Bartlett and Gunter in Opelika, Ala.

The way to keep that from happening is to set financial goals. You decide on a financial goal and determine what you have to do to reach it, Ms. Gunter said.

"Most people in their minds have a vague idea about where they'd like to be, but they have no idea of how to get from where they are now to where they'd like to be," she said.

The value of goal-setting at all ages can't be overstated, she said. Going through life without financial goals is like taking to the road without a clear destination. It may be fun for a while, but sooner or later you find you don't know where you are or how you got there.

The best time to start financial goal setting is when you are young, Ms. Gunter said, but "it's hard to tell young people that. They think they have forever."

Ms. Gunter identified five life cycles. "People should set different goals during each of these life cycles," she said.

Cycle I: Young wage earners; no children; right out of high school or college; on the lower end of the earnings scale. "They are concerned with getting from paycheck to paycheck. But at this stage of life it's very important to set a basis for cash budgeting and cash management. Their short-term goals are to pay the rent, buy the groceries and live day-to-day, but they also need to begin to build a basis to accumulate wealth."

Cycle II: Young, married with children. "Their goals are a little different. They have more family responsibility. They have to think more about what if the wage earner

becomes disabled or dies. They have to think more about risk management or insurance. Disability insurance and life insurance are real important for this age group. If something happened to the primary wage earner, how would the spouse take care of the children, pay the debts that have accumulated. Their goal is to provide for the continuance of adequate resources to continue their lifestyle."

Cycle III: Married with school-age children. "Their needs are changing. They are starting to think about educating children. They are trying to position their assets and shift their income to accumulate money to pay for the children's college education."

Cycle IV: Married or divorced people whose children have left home. They are at the age where they have

to accumulate their own wealth to face their retirement. They have to develop an investment strategy at this time to preserve ** and increase their wealth so that they can have that nest egg for when they want to retire."

Cycle V: Retirees. "Their main concern is managing their financial affairs to provide the continued income and financial security throughout their retirement years while preserving their estate. They don't want to eat up all the money they've accumulated. They want to be able to leave some behind."

The first thing to do in goal setting is to decide where you are now by completing a financial statement. Choose a specific date. For example, Dec. 31 is good because you have earnings statements and other information coming in for income tax purposes.

On a financial statement, you write down very specifically your assets, that is, everything you own and its current value. That includes anything that can be sold or cashed in, such as checking accounts, certificates of deposit, your house if it's paid for and personal belongings of value.

Next you list your liabilities or debts. A liability is anything you owe, from home mortgages to credit card balances to unpaid federal or state taxes.

To get your net worth, subtract your liabilities from your assets.

For many people, putting together a financial statement is tedious, frustrating and time-consuming, but it's worth the effort because it provides a basis for making a financial plan that will get you where you want to be.

"People have an easier time coming up with what they owe than what they own, because they don't consider some of their assets as assets," Ms. Gunter said.

Now comes the fun part. Think seriously about what you want your money to do for you. Consider the life cycle you're in. Decide on some goals. Some may be short-term, others long-term. Write them down and give yourself a target date.

It's important to be specific. A short-term goal of "I want to have a fun family vacation next year" is not specific enough. It's better to say "I want to spend five days at Disney World next summer."

A long-term goal might be something like: "I want to have $500,000 set aside to supplement my Social Security benefit and my pension after I retire." To come up with the specific amount, look to your financial statement to tell you where you are now and determine the investments that might be income-producing in the future. Then consult the Social Security office and check out your pension plan at work to determine how much you can expect to receive at ages 62 or 65.

After you know that, you can figure how much you need to save each month to reach your goal.

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