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Lately, you've heard a lot about the excesses of the last bull market. Whether you're talking about financial institutions that had a field day with leverage or consumers who took on too much debt, everything nowadays seems geared toward reining in those excesses and finding less extravagant ways to get what you need.
But for most people, the number of different financial goals they have presents their biggest challenge. Beyond the longest-term goals of saving for retirement, you also have more pressing concerns -- things like a vehicle, a down payment on a home, or your children's college education. No matter what you've saved for, you've likely seen the money you've invested toward it drop in value. Is there any way you can still have everything you've strived toward for so long?
It's not all about retirement
Often, financial planners focus on retirement. Yet things like college savings and buying a home are often much more important to you, since you need those things first. So, why do we spend so much time talking about something so far in the future?
The whole concept of setting aside money for your retirement is about more than just securing your golden years. It also provides a useful framework to teach people about basic investing concepts, such as the value of compound returns and the impact of inflation, taxes, and other costs on the money you set aside for tomorrow. These concepts apply to all of your investments -- not just what you save for retirement.
How to get everything you want
So, what's different about saving for college, or a down payment for a vehicle for that matter? Is it all just a matter of degree? Or do you need a completely different strategy for college than you do for retirement?
For guidance on this, I turned to our Rule Your Retirement newsletter. You see, Foolish retirement expert Robert Brokamp knows that when it comes to saving, people aren't focused squarely on retirement. That's why his intelligent asset allocation models work with a variety of different financial goals -- not just retirement.
For instance, let's assume you've got a four-year-old and want to start saving to put your child through college. Here's the thought process behind a smart savings plan:
- Since you won't need the money for another 14-17 years, you have enough time to include stocks in your portfolio.
- In fact, early on, taking some aggressive risks with small-cap stocks like Blackboard (Nasdaq: BBBB ) and emerging-markets opportunities like MercadoLibre (Nasdaq: MELI ) aren't out of bounds.
- As the years go by, though, you'll want to slowly but steadily ease back on the throttle, retreating to more conservative stocks. Dividend-payers like Procter & Gamble (NYSE: PG ) and Chevron (NYSE: CVX ) are safer bets than the high-octane stocks you initially invested in.
- When your child is in high school, you should have a healthy dollop of bonds to go with your stocks, with both Treasuries and highly-rated corporate bonds from issuers like Pfizer (NYSE: PFE ) and Johnson & Johnson (NYSE: JNJ ) .
When you think about it this way, saving for college -- or any other long-term goal -- really isn't that different from saving for retirement. Sure, some of the methods for investing differ. For instance, while you can take advantage of IRAs and 401(k) accounts for tax benefits to help you retire, college savers need to consider other vehicles, such as 529 plans and Coverdell education savings accounts. Similarly, those looking at homes need to consider new tax credits for homebuyers as well as the incentives that companies like Toll Brothers (NYSE: TOL ) have offered recently.
But while the jargon varies from goal to goal, the basic idea is much the same. As long as you have enough time to ride out the bumpy road of the stock market, you can expect to use stocks to help you reach your goals.
So, if you're feeling like everything's going wrong with your savings lately, don't give up. You don't need to have two completely different approaches to how to get back on track. All the things you're learning to do with your retirement savings will help you with your other goals as well.
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