For all investors, the first — and some might say the most important — step is determining your financial goals. If you plan to retire 20 years from now, you’ll probably invest differently from someone who hopes to be able to stop working in the next 5 years. And if you want to buy a home within the next year or so, you’ll probably be more cautious with that investment principal than with the money you plan to use farther down the road.
Possible goals:
Building an emergency fund
Buying a home or vacation property
Furthering your education
Spending a year in volunteer work
Creating a retirement nest egg
Opening your own business
The catch is, in all likelihood, that you have varied goals, with different timeframes. One of the challenges of investing is dividing up your portfolio, assigning a portion of it to short-term, another to medium-term, and the rest to long-term objectives. The amount of money you’ll need and when you’ll need it influences both the types of investments you make and the degree of
risk
you are willing to accept.
It’s crucial to have an emergency fund. Most experts advise you to keep at least 6 months’ worth of living expenses in easily accessible liquid accounts, including a savings or
money market account,
certificates of deposit (CDs),
Treasury bills,
and short-term bond funds. If you lose your job, become ill, or experience some other crisis, you’ll have money to pay your bills. It’s worth the peace of mind, even if you never dip into it.
1. Make a
chart of all your financial goals
2. Estimate how much money you’ll need to reach each goal
3. Identify when you’d like to reach each milestone
4. Determine how much of each paycheck you’ll be able to dedicate to investments and whether your goals are realistic
5. Be diligent about setting aside that money each month
