Do you have a financial goal or is it a dream? A dream is vague like "I want to send my child to a good college," or "I want to be comfortable in retirement." A goal is specific with a date and dollar cost. For example, "Over the next four years, we will save $12,000 for a car" or "By the time I am 60, I will have $250,000 saved to be able to afford to scale back to part-time work."
How do you set a financial goal? Write the goal down by answering the questions who, what, when, where, and why? Since this is YOUR goal, begin your goal statement with "I/We". Then state exactly what you want to accomplish. Then include specific dates in your goal statement and state exactly what you will do to achieve it and how (e.g., save $5,000 annually in an IRA). Keep re-writing your goals until they are specific and measurable.
Tell other people about your financial goals so they can hold you accountable. Track your progress and make changes to your goals as personal circumstances or economic conditions change. Use the Financial Goal-Setting Worksheet to calculate the amount you need to save monthly to reach your goal(s) within the time period available to save or invest.
Financial goals provide a framework for investment decisions and can help narrow down your choices. For example, if you have a short term goal, like a new car purchase in three years, you'll want to keep this money liquid so that there's no loss of principal. Equity investments like stock or growth mutual funds would be a poor choice due to the historical volatility of the stock market in short time frames.
On the other hand, if you have a long-term goal, like college expenses for a newborn or retirement in 20 years, cash assets are a poor choice due to the risk of loss of purchasing power because of inflation. We also know from history that stock is less volatile in longer time frames and provides the best historical return of any type of investment.
Bottom line: determine your financial goals before you invest and know what you're investing for. Remember, people don't plan to fail; they fail to plan - and set financial goals.