Investing Basics

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Money has little to do with some of our most important personal goals. These include spending more time with family, doing volunteer work, or developing a hobby. Yet, other personal goals clearly can be defined as financial goals. These include:
Paying off your debts. By establishing a repayment plan, you can repay your debts in a systematic fashion. A repayment plan may take years. It requires discipline to control your spending. For example, to pay off $5,000 in credit card debt at 14% interest requires monthly payments of $240 for the next two years. That's assuming you make no additional charges. As long as you owe, you sacrifice other financial goals for the sake of paying creditors.
Saving for a down payment on a home. You may be thinking about buying your first home in a few years. The normal size of a down payment is 20% of the home purchase price. At today's home prices, this means saving somewhere in the range of $25,000 to $50,000. To save $25,000, you would have to set aside just over $4,000 a year for each of the next five years, if you can earn an 8% rate of return.
Saving for a child's college education. For the school year that began in August 2007, the average yearly tuition bill at public four-year colleges or universities rose 6.6% to $6,185, the College Board said in its latest survey. For private institutions, tuition prices rose 6.3% to $23,712 a year. By setting aside $260 every three months for the next 15 years, invested at 8%, you will have saved nearly $30,000. This should make a considerable dent in the future cost of your child's college education. This assumes you use a college savings plan or other tax-advantaged account.
Saving for retirement. For most of us, saving for retirement is our most important financial goal. We may live 20 or 30 years after we stop working. Financial planners strongly advise against depending entirely on the income you receive from Social Security. To maintain a comfortable living, you may decide you want to save $500,000 in another 30 years.
Fortunately, you can invest with a tax-deferred account such as an IRA or 401(k) plan. In addition to postponing any taxes until the future, these accounts offer compounded growth. For example, if you invest $5,000 a year for 30 years at 8% in an IRA, the account will grow to almost $567,000. If you were to save with a taxable account and were in the 25% tax bracket, however, the amount would only reach about $395,000. This is the power of compounding you receive by using a tax-advantaged account.
Finally, keep in mind that it's quite common to have more than one financial goal. It's important to identify all of them, and set up a savings plan for each goal.
2008-07-21 14:37:56
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