Setting Priorities-Identifying goals

Unless you win the lottery, you probably won't achieve every financial goal. But you can go farther than you think if you focus on what matters most.

What are your top three financial objectives?

Most people, when asked that question, answer with general goals, such as achieving financial security.

The fact is, many of us have never thought much about which financial objectives really matter most. Instead, we muddle through our financial lives, spending to meet the day-to-day expenses that always clamor for attention. There's nothing terribly wrong with that approach -- except that it risks leaving the most important objectives unfulfilled.

That's what this lesson is all about: helping you to choose which financial goals matter most so that you can make sure they happen.

That's not as easy as it sounds, since financial goals continually collide with one another. Paying for a child's braces may rob money that would otherwise go into his college fund, for example. And saving effectively for your kids' college can wipe out any hope of putting aside adequate money for your own retirement.

That's why to get what you want most you must 1) decide which goals will take priority and 2) work toward the lesser goals only after the really important ones are well provided for.

Fortunately, you have at least one ally in meeting your long-range goals: time. That's an advantage because of the power of compounding -- the fact that even a small amount of money can earn interest, and that each year that interest gets applied to a growing sum of money.

Suppose, for example, you put aside only the cost of a single candy bar -- about 65 cents -- each day. Invested in a tax-deferred account paying 5 percent a year, that string of savings would grow to $3,079 in just 10 years and to $16,521 in 30 years. For other examples of the way that money can grow over time, try CNN/Money's savings calculator.

To put the power of compounding on your side, you have to start early. Suppose there are two siblings who both invest in Individual Retirement Accounts earning 8 percent a year. The sister starts at age 20, and for the next 10 years she stuffs $2,000 a year into her IRA. At age 30, though, she stops and never adds another penny.

Her brother waits until age 30 to get started, but then dutifully salts away $2,000 a year for the rest of his life. Which sibling do you think will be better off? In this case, the early bird will always be ahead. The sister reaches age 65 with over $428,000, while her brother will have a little under $345,000 -- about 20 percent less.

Of course, it's far better, to start early AND keep it up. If both siblings started saving $2,000 a year in an IRA at 20, and keep it up until retirement, and you'd end up with nearly three-quarters of a million dollars.

The point is that to put time on your side, you need to decide early which of the many possible financial goals are really worth pursuing -- and start working toward them.

To get started, make a list of all the things that you'd need to feel secure, happy or fulfilled. These can range from the weighty (getting out of debt) to the luxurious (a Lamborghini). You don't need to prioritize them yet. But you should try to get down all of the money-related things that will really get your motor started. And if you have a spouse or significant other, it's a good idea to do this exercise together -- assuming you think your relationship can survive it! Here are some of the less frivolous items that you may want to include among the possibilities:

Once you have your list in hand, push on to the next section where you'll determine which of these goals are most important to you.

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