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Setting your financial goals

Discussion in 'What is Investing? (START HERE)' started by InvestOpen, Jul 4, 2018.

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  1. InvestOpen

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    Setting Your Financial Goals

    Probably the most important part of investing is setting your financial goals. Understanding the specifics of your goals in both the length of time, the amount that you want to save, and why define how you will save and invest. Setting a goal of wanting to be able to retire at 60 years of age doesn’t provide enough to plan with as you need to know how much you’ll need to have at that point in order to be able to retire. As such, there are a few key components of setting financial goals that can be defined by the net present value formula:

    Beginning Principal: No matter the size of the initial amount, the first dollars put into an investment create the foundation of the investment. The larger the initial amount the less will be required of the other components to achieve the ending principal. Because the beginning principal starts the entire investment, it has the most amount of time out of any of the payments made into the investment to generate gains.

    Time-Frame (Number of Periods): Understanding how long you have to invest, how often you plan to invest, as well as how long the investment provides a significant input into your financial goals and plans. The longer an investment grow, the more you add to the investment earlier, the more gain it can achieve, even with small amounts of interest.

    Additional Payments: Outside of the beginning principal, additional payments (often referred to as annuity payments if they occur annually) put extra capital to work through the life of an investment. The size, frequency, and time of when these payments are made can dramatically impact the total gains.

    Rate of Return (Interest Rate): Investments normally provide gains in terms of their interest rate. The interest rate simply means taking the amount of gain and dividing it by the original invested amount. This gives you an idea of how much you’re making proportionally to the initial outlay. Compounding factors allow for the interest rate to be applied to the updated balance at the end of each time period. Higher interest rates generally carry higher risk, such as stocks versus bonds. When investments have more time to mature they can more readily absorb fluctuations associated with higher risk investments. With shorter time frames investments don’t have enough time to average out the highs and lows.

    Ending Value (Future Value): The ending amount of money that is required by the investment defines the investment more than any other component in setting goals. If a person needs $500,000 to live on in retirement at age 65, then any investment must achieve this amount through a combination of initial investment, rate of return, or additional payments.

    Changes in each of these components will have a direct impact on the others. For example, if you achieve a higher interest rate, then you may not need to start with as much capital, or make as large of additional payments.

    This may sound daunting, but you're not alone and there's teams of people available ready to help you.

    < Before You Start Investing | Introducing your financial team >

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    Last edited by a moderator: Aug 1, 2018
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