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Before you do anything else, you need to think about your goals. If you don't know where you're heading, how can you get there?

Goals are as individual as you are. Maybe your dream is to sail around the world. Perhaps you'd like to retire early. You may have children you'd like to attend a good college. Possibly you have debts you need to get rid of.

Do some thinking about where you'd like to be next year, in five years, in ten years. Many people don't want to do this, because life is so unpredictable. Why plan?

You have to plan if you want to accomplish your goals. And goal-setting is the first step in any financial planning process.

Make a list of the things you are trying to achieve:

Sample goals

• Accumulating emergency funds
• Putting the kids through college
• Getting out of debt
• Planning for retirement
• Buying a house
• Taking a dream vacation
• Improving a house you already own
• Financial independence

Most people come up with statements like these and stop there. We want you to be very specific about your goals. A goal is not really a goal until you have a time frame (when you need to pay for the goal) and a cost (how much the goal will cost you) attached to your statement.

We also want you to separate your goals into

• short-term: less than three years
• intermediate-term: between three and five years and
• long-term: more than five years

Take a pencil and paper and write down your goals. Talk to your family and friends. Do some deep thinking. Ask yourself which goals are wants and which are needs. Do you need to retire at age 55 for health or family reasons, or is it something you just want to do?

We're not saying that you should eliminate the things you want but don't need; just that looking at things that way will help you to prioritize. And since few of us can have everything that we want, knowing your priorities will help you determine what has to change for you to get where you want to go.

Time Horizon

You have different time horizons for the different things you want to do with your money. There's the car you'll be needing this year, the new roof in five or six, and the trip you want to take for your 50th wedding anniversary.

What form your savings will take for these goals should be determined by how far away they are. Naturally, you should keep your emergency money in liquid investments. For financial planning purposes, the money you are putting aside for any goal that's less than three years away should also be liquid.

When interest rates are low, it's very hard to keep sums of money liquid, because you feel like you're not earning enough on your money. What you are doing is preserving principal. And that's important if you're saving for emergencies or for the down payment on a house. You want the money to be accessible when you need it.

If you put all your money in the stock market, you could have a sizeable amount of money in thirty years. But between now and then you could see many peaks and valleys. What if there's a deep valley in three years when you'd really like to buy a house? That's why money earmarked for goals of less than three years should be in cash and alternatives.

Three to five years is intermediate term. The money for intermediate term investments should be in cash and alternatives and short and intermediate term bond funds, Series EE and Series I bonds, and Treasury bills and notes.

More than five years is long-term. For the long term, you want to invest your money. You should think seriously about the stock market for that time horizon. As you get closer to your goals, you should begin to convert things like stocks and longer-term bonds into more liquid investment vehicles such as short-term bonds and cash.