When you set specific investment goals, consider two essential factors:

- The amount of money you plan to accumulate

- The time frame for saving that amount of money (keep in mind whether your goal is a short- or long-term) Specifying a time frame is an important part of goal-setting. How do you come up with a time frame that makes sense for the amount of money you plan to accumulate? For example, if you’re saving for retirement, your specific goal may be to maintain a standard of living comparable to what you achieved during your working years. Although you need a comprehensive retirement planning program to take into account all the factors unique to your situation, a basic truth remains: You hope to have annual purchasing power equivalent to your current annual income. You can forecast a time frame by considering when you hope to retire and by reviewing the significant transitions in your life and family history. Look at yourself and what you want out of life. Do you want to retire at 50? What kind of longevity runs in your family? Does your employment or profession define who you are, that is, would you feel empty or lose self-esteem if you gave up your career? After you arrive at a projected retirement year, determine whether you can save enough money to retire at that age and maintain your current standard of living. Consider the following factors:

- Your projected annual income between now and your preferred retirement age.

- The annual rate of inflation

- Anticipated income you will be able to draw during retirement: Social Security, pension, 401(k) funds, and personal savings If you can afford to retire at your projected year, your time frame is valid. (If you need help with the numbers, contact a professional retirement advisor.) To make your investment plan work for you, you not only need to design well-founded, long-term goals, but you also have to project realistic time frames for your plan. If your goals are mushy, or if your targets in time are ever-moving, you will never muster the discipline to achieve the financial security you seek.

Developing an investment plan to meet your goals and time frames

After you calculate a realistic monetary goal and a reasonable time frame to achieve it, work backward to determine how much money you need to invest on a regular basis to accomplish your goal. You’re bound to quickly realize that the sooner you get started on a systematic savings and investment plan, the more likely you are to realize your dream. You need to save money in order to have funds to invest. To give you some incentive, Table 1-1 is an illustration of a hypothetical investment plan that shows the impact of compounding the interest on your savings and investments. Compounding interest means that you leave all the interest you have earned on your savings or investments in your account and add it to your principal.

Suppose that you save $100 a month for a year. After you have accumulated $1200, you invest that amount in the stock market. Every month you save another $100, Each year on January 1, you add another $ 1,200, and you do this for 25 years. Your total investment over 25 years is 25 × $ 1,200, or $30,000. If your investments provide you a steady return 8%, you will have accumulated $1,296 by the end of the first year, to which you add an additional $1,200 for a total of $2,496. If this pattern continues year after year, by the end of the twenty-fifth year you will have accumulated $99,945.27. If you use 12% for the compounded annual rate of return, your 25 years of investment grows to $180,400.67. The Rule of 72 is a handy and reliable way of calculating compounded growth. Suppose that your investment yields a solid annual return of 8%. Divide 8 into 72, and you get 9. An investment that yields 8% annually will double in value in 9 years. Doing the math: If your annual return is 12%, your money will double in 6 years.

Making a Commitment to Work for Your Goals

The key to success in the stock market centers on your commitment to achieving your goals. Saying that you’ll give investing a try won’t do the job. You have to begin with a program that takes some money right off the top of your monthly income. Otherwise, you may be tempted to use your investment money for other purposes. Refer to Table 1-1 for a look at what $100 a month can do for you in the long run. If your goal is more ambitious, plan a higher investment amount, but make the sum doable. Spelled out another way, investment in the stock market is deferred gratification. You put off today’s pleasures eating out, extra rounds of golf, the luxury car that has to be financed, the trip to New Zealand, whatever for the anticipated return of future security. If you’re ready to make that commitment, your next move is to settle on a systematic payment schedule for your investment dollars.

Using payroll deduction

The easiest approach to meeting your financial goals is to make your savings/investment program automatic. Perhaps your company has a credit union or other program that enables you to use payroll deduction for depositing directly to your savings account. When the time comes for your annual investment, you take your $1,200 or whatever sum you settled on and invest it wisely. If you don’t have access to this type of program, your friendly banker can help you set up a savings account with automatic transfers from checking. Exercising discipline Much of the discipline you have to apply to reach your financial goals has to do with controlling your spending. You live in a consumer economy. Every day you face pressures and appeals to spend for this or that, and sometimes for worthy causes. You need a budget and a mindset that will keep you from spending the money earmarked for your savings and investment program. Follow the first rule of every savings program: Pay yourself first. This discipline isn’t as much fun as blowing all your cash the second it lands in your pocket. Just imagine, however, the excitement you can enjoy watching your investments grow.

Practicing patience

Beyond discipline, you need patience. No law suggests that stocks only go up. As the legendary financier J.P. Morgan allegedly responded when asked to predict stock market performance, “The market will fluctuate.” If you panic and sell the first or second time your carefully researched stocks take a hit in the market, you will never make much money. In fact, you may not make any. You have to have the patience to ride out inevitable market declines. Don’t expect guarantees. Some of your stocks are going to fall. Some will fall sharply. Most will come back. Be patient. Over the long haul, stocks produce a return greater than almost any other investment.

Are You Ready?

Here is your final checklist of decisions you need to have made in order to get started in investing in the stock market.

1. Have I set my goals and objectives?

2. Have I determined the amount of money I need to realize my goals?

3. When will my goals be realized?

4. Do I have a strategy for implementing my goals?

5. Have I calculated the required rate of return on my savings and investments?

6. Am I willing to bear a risk?