Step 1: Spend less than you earn

Perhaps the simplest financial concept is the toughest for us to conquer- spend less than you earn. After paying your living expenses (bills, loan and mortgage payments, cost of food, charitable contributions, taxes, etc), you can begin to save and invest toward your future. If you are spending more than you earn, you must find a way to change this. You may even need to change your lifestyle- drive a more efficient car, eat out less, live in a smaller home, cancel your cell phone, etc. Make a commitment to your financial success to spend less than you earn. This may take a lot of discipline, but is an essential first step towards your financial wellbeing. Once you spend less than you earn, you will be on your way to reaching all of your goals.

Step 2: Prepare for an emergency

Before doing any actual investing, you need to establish an Emergency Fund (cash held in an account for emergencies). This fund can be used for various emergencies, but, its main purpose is to pay your living expenses in the event of a sudden loss of income. That is, if you lose your job, you will still be able to pay your bills without having to abruptly withdraw money from your investment accounts. A relatively conservative amount to keep in your Emergency Fund is that equal to 6 months of living expenses.

Step 3: Determine your goals

Would you take a road trip without an ultimate destination? How long will the trip take? What should you pack? In what direction would you drive? These questions are easily answered once you know where you are going. The same is true for investing. Before any investments are actually purchased, you must know your ultimate destination- you must create a list of your goals.

Determining your goals and writing them down will serve as the foundation for a proper investment plan, allowing you to customize your investments to each specific goal. Some examples of goals are: retirement, college, buying a house, taking a vacation, and buying a car.

In writing down your goals there are a few pieces of information you must identify. You must know the following about each goal: name (NAME), time until realization (TIME), cost in todays prices (COST), planned contributions (PAYMENT), and current money saved for this goal (PV). Below is an example of a goals list:

NAME - TIME - COST - PAYMENT - PV - RATE

Retirement - 30 years - $2,500,000 - $1,000 mo.- $350,000 - '?

College Kid 1 - 12 years - $100,000 - $500 mo.- $20,000 - '?

College Kid 2 - 10 years - $100,000 - $500 mo.- $22,000 - '?

Buying a Boat - 6 years - $30,000 - $150 mo.- $0 - '?

Step 4: Invest

After determining your goals, you can begin to invest toward achieving them. Doing so means calculating the annual rate of return (RATE) needed to achieve each individual goal. For example, you may need a 7% rate of return to achieve your retirement goal, while only a 5% rate of return to attain your college goals. Thus, your actual investments may be significantly different for each goal, but will be tailored to each individually. (There are online resources and calculators that offer assistance computing your required rates of return.)

When purchasing investments, you need to buy those that will collectively earn the annual rates of return necessary to reach your goals. You may choose to invest on your own, use an investment advisor, or search for a broker/dealer to assist you with your investments. No matter how or where you invest, there are a few things to remember:

Put it in writing: Writing down your goals and how you will invest to achieve them is very important and will serve as a framework for decision making during uncertain times in the future.

Use Index Funds: There are thousands of different investments to choose from (for example: mutual funds, stocks, bonds, and annuities). Index Funds give the greatest advantages for reasons of cost, performance, simplicity, transparency, and diversification.

Get some advice: Paying a little for the advice of an investment professional can be very wise. There are even investment advisor firms online that will tailor your investments directly toward your goals for you.

Be unemotional: The financial markets fluctuate up and down- so will your investments. If you have any goals that are less than 5+ years away, you may want to invest these funds into something very conservative (such as a money market or certificate of deposit).

Rebalance periodically: Accounts should be rebalanced annually to keep in balance with your goals.

Final thoughts

When investing toward your goals, you need to make sure that no unforeseen circumstance prevents you from reaching them. Insurance is a very useful tool to assure your goals are realized regardless of what situation may arise. Through analysis, you can determine which goals are at risk for not being achieved should you get sick, become disabled, or pass away. Having enough money to pay for your goals regardless of death, disability, health problems, or any other unforeseen circumstance is an essential part of a solid financial plan.

In addition, estate planning serves an important role when planning your finances. A will, trust, or power of attorney can enable you to keep your plan in motion far beyond your living reach. (Please consult an attorney to discuss your estate plan.)

Having a solid, well-designed plan for your finances is something you can accomplish. With a little time and effort, you can be on your way to spending less than you make, establishing an Emergency Fund, and tailoring your investments to each of your specific goals. Plan your finances wisely, and then commit yourself to your plan.