This is the first article in a multi part series centered around a different (and hopefully easier) way to think about your financial goals from an overview perspective.
When thinking about our financial goals, it is often much easier to think about them in separate buckets. Usually we have shorter term goals (bucket number 1), intermediate term goals (bucket number 2), and longer term goals (bucket number 3). Planning the funding of these goals, and the appropriate risk tolerance to take in investing the funds for these goals is very important and a large part of financial planning.
In the first bucket, comes financial goals with the shortest time horizon. For these goals, we do not want to take on much investment risk, rather just budget for the upcoming expenses. Examples of these types of goals can vary from a big family vacation, to a bathroom remodel. Another piece of the first bucket, and probably the most important, is your emergency savings, or rainy day fund. This is here for the unexpected large expense that pops up, or to be used when an income stream unexpectedly shuts off.
Bucket number two contains consists of intermediate term goals. For goals in this bucket, we have the ability take on a bit more investment risk because we have a longer time horizon in attempting to complete these goals. Financial goals in this bucket normally consist of planning for college expenses, or maybe a second home.
The final bucket and generally the most anticipated, is the bucket of your retirement assets. This is the bucket you hope to get started on the earliest. Because of the long time horizon for this goal, the money in this bucket has the greatest ability to take on investment risk. Often, the majority of the heavy lifting from this bucket happens inside 401(k) and similar retirement plans. It is also important to realize that just because the goals for this bucket are far away does not mean that it should be put off by any means. Compounding interest over a long time horizon is critical for success with this bucket. will greatly help this bucket as it has more time to work.
While at any point in time, you may have your eyes set on the closest goal in front of you chronologically, it is important to maintain awareness off all of your goals. When you begin to focus on just one goal, others can be forgot about. Sometimes we just intend to put a certain goal on the back burner for a while, but usually they are forgotten about much longer than intended. It becomes much harder to accomplish goals you set up for yourself up front, when they are forgotten on the back burner.
Overall, it is important to set financial goals, work to find a pathway for success in these goals, and understand appropriate risk levels for each goal. If this is something you, or someone you know would like to talk to a professional about, do not hesitate to reach out. My email address is Austin.firstname.lastname@example.org and I would love to sit down and talk financial planning with you.
Associate Investment Adviser