Setting Financial Goals: Why Are You Investing?

The financial goals you establish when you begin investing will determine the choices you make and risks you are willing to take. Without setting goals, you can quickly find yourself talked into a decision that is not in line with your ultimate destination. Ask yourself a few questions before you enter the stock market to learn about which investment options may be right for you.

What are my Immediate Needs?

Even though most investment managers will advise you to think long-term, it is important to keep short-term goals in mind. If you are entering a period of time when you will purchase your first house, for example, your goal may be to generate enough income off your investments to assist in your costly mortgage payments. Similarly, if you know you will be an "empty nester," you may find yourself with extra cash since your children are out of the house. In this case, it is smarter to put away for retirement than to earn dividends off your stock purchases.

What are my Long Term Needs?

Your long-term needs are more consistent than your short-term needs, but they also will change as you age as an investor. At first, you may be saving to send your children to college. For this purpose, you will want largely risk-free investments that will result in a great deal of capital appreciation. Once your children have grown, you may be saving for a second home. In this case, you can afford to be a little riskier with your investment decisions. You can consider commodities trades, or futures contracts, to try to make a large amount of profit in a short period of time.

What Resources do I Have?

The resources you have at hand will ultimately determine how much you can invest and for which purposes. For example, if you are a teacher and have a pension plan provided to you from your school district, your retirement may be fairly affordable. If your retirement goals are modest, your investment decisions can also be modest, protecting you from risk and providing you with a little extra cash along the way. The amount you contribute to your investments will also depend on these other resources. An individual who is already placing 4 percent of her salary in a 401k every year may not need to invest as much as an individual whose company does not provide a retirement plan.

What will my Legacy Be?

In the end, you cannot take your money with you after you leave this Earth. The accumulation of wealth is only valuable while you are still living and can spend your wealth. If you are not concerned with leaving money behind for future generations, your investments can be set up to provide you with a constant stream of income, always paying out earnings through dividends. If your goal is to leave everything to your beneficiaries, though, you will aim for capital appreciation of assets. This will preserve the largest chunk of value for future generations while keeping your personal profit low.