Goal setting is a chief prerequisite to effective investing. As people consider what to do with their money, they need to think about where they want to end up financially. Although money should not be an end, in and of itself, it is a tool that can be used to accomplish established short-term and long-term goals. “Do not weary yourself to gain wealth, cease from your consideration of it. When you set your eyes on it, it is gone. For wealth certainly makes itself wings like an eagle that flies toward the heavens” (Proverbs 23:4-5).
Short-term goals are current lifestyle goals: debt reduction, savings, and giving. Long-term goals are those that will be accomplished over a number of years: funding education costs, saving for retirement, and giving an inheritance. The subject of this article is establishing long-term goals.
All goals must have two things in common. First, they need to be written; second, they need to conform to biblical principles. Written goals are more apt to be achieved than the dreams and goals that remain in our heads, but few people ever take the time to write them down. The second requirement is God’s Word. The Bible does not offer an individualized plan for how to use money, but it does give principles that we can rely on as we make plans and establish goals. “By wisdom a house is built, and by understanding it is established; and by knowledge the rooms are filled with all precious and pleasant riches” (Proverbs 24:3-4).
For parents, funding their children’s college education is most likely one of their larger financial concerns and one of the main reasons why they need to invest. Over the next decade, with an assumed cost increase of 6 percent per year, it is estimated that education costs at a state institution will likely rise to exceed $50,000 for a four-year education. Most middle-class American families with small children don’t have $50,000 when they start thinking about funding their children’s college education. However, they may have some seed money that they have set aside for education. Therefore, they need their money to maintain steady growth over the next decade. To accomplish this, the seed money should be invested in fairly aggressive, quality, high-growth companies with a healthy annual return. Although aggressive investing will allow the seed money to grow at a faster rate, there is also a higher risk than with less aggressive investing. The greater the return expected, the greater the risk assumed.
If parents have less time and more money, they might want to consider buying CDs and savings bonds as a means of protecting the cash for the short term until it is needed.
After figuring out how much money they will need and how long they have to raise the money, parents need to consult with a trusted and qualified financial advisor to select the funds that are best. When looking for mutual funds to accomplish the investing goals, consult the current Consumer Reports mutual fund edition and other sources of trusted information, such as Sound Mind Investing.
“Go to the ant, O sluggard, observe her ways and be wise, which, having no chief, officer or ruler, prepares her food in the summer, and gathers her provision in the harvest” (Proverbs 6:6-8). Just as the ant gathers food in the summertime so it will have provisions in the winter, people need to prepare by saving money during their years of highest income production for a time when their incomes will decline. Nevertheless, people cannot sacrifice their current needs or their current gifts to the Lord for the sake of saving for retirement; nor should they maximize their retirement fund contributions and then have to use credit cards to meet daily living expenses.
Other than company-sponsored retirement programs, traditional and Roth IRAs are the two most popular retirement investment tools. With traditional IRAs, any money that is invested is tax deferred. With Roth IRAs, taxes are paid on the money before it is invested into the Roth IRA. It then accumulates tax free. For younger people with many years to accumulate earnings in a retirement account, the Roth IRA is an excellent investment tool.
The final long-term goal is the distribution of estates. Estate planning is a vital part of any sound financial strategy. How and where assets will be distributed could be affected by whatever happens in the economy within the next few years. Many parents may be planning simply to leave an inheritance to their children in their wills, for distribution after their deaths. However, if recession leaves the children in a precarious financial position, parents may want to give them some of their inheritance sooner.
Not only does giving the inheritance during the parents’ lifetime afford the parents an opportunity to help their children learn how to manage money wisely, there also are favorable tax consequences associated with using the annual gift exclusion to reduce the size of the parents’ estate. Under the current tax provision, both parents are allowed to give up to $14,000 per year each to as many individuals as they want.
Another benefit of lifetime giving is that it allows the estate to be reduced by giving charitable contributions. One popular method to reduce the estate and reap current tax advantages is to transfer an asset to a charitable remainder trust. For the most accurate information concerning this type of trust, we encourage you to consult with a trusted, qualified financial advisor, a CPA, or an attorney.
Generally there are three questions that must be answered when planning an inheritance.
1. How much money do we want to leave to our children?
2. How much money do we want to leave to charity?
3. How and when do we want to distribute this inheritance?
Record the answer to these questions and take it with you when you meet with the attorney or financial advisor who will help you draft your will and inheritance plan.
How you pursue each of your long-term goals will depend on your individual temperament and your personal tolerance for risk. As you establish these goals check your motivation. Am I actively seeking to honor the Lord with my money? Do I have a vision for how and where God wants me to use this money? Do I know why I am investing? “To a person who is good in His sight He has given wisdom and knowledge and joy, while to the sinner He has given the task of gathering and collecting so that He may give to one who is good in God’s sight. This too is vanity and striving after wind” (Ecclesiastes 2:26).
Originally posted 4/23/2013.
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