There is no question about the need to plan for one's financial future, but where is the best place to start? The most important question for the investor to ask is, "When will the money invested be needed?" The time horizon starts the day the money is invested and ends when the last dollar is withdrawn. There can be several different financial goals, with a unique time horizon for each. For example, an individual may have a 40-year time horizon to retirement but may have a 15-year horizon for his children's college education.

Investment Horizons
Investing for a long-term horizon would be for 10 years or more. Here, one can afford more risk for a higher potential return. Most investment professionals would recommend stocks or stock funds for the long term, because -- although there are no guarantees -- historically equities have outperformed bonds and cash investments. The amount of time involved also tends to protect against downside risk, because it allows time for recovery.

When investing in stocks or stock mutual funds it is best to put money in gradually, rather than all at once. The best approach to accomplish this is to use dollar cost averaging. Dollar cost averaging requires investing equal sums of money at regular intervals over a long period of time, thus reducing the timing risk. Thus, over time, the theory is the purchases are at a lower average cost per share than the average price per share.

An investment horizon of five years would require both growth and liquidity. Typically, this would be accomplished by combining bond, cash, and stocks or stock mutual funds in relatively equal amounts.

If the investment horizon is three years or less, liquidity is critical. Dealing with market fluctuations is difficult. Thus, it is probably best to invest in cash instruments such as money market funds, certificates of deposit, Treasury Bills, or short-term bond funds.

Considerations
Before determining the various time horizons for the individual investor and the appropriate investments for each, there are some basic principals to keep in mind for the development and implementation of a retirement plan. The investor should always pay the investment plan first each month. It is best to allocate a set amount from net income -- many financial planners suggest five percent -- to go automatically from a money market account or checking account.

The concept is, if it is not seen, it is not spent. The amount allocated monthly to investment should be expressed in terms of a number or a percentage -- something that can be measured. It is also good to set a goal to have a specific amount saved by a deadline date.

It is important to be aware that the main reason people do not save or invest is because they fail to develop a financial plan they can work with. Before starting an investment program, one should create an emergency savings program equal to three to six months of typical household expenses. This provides a safety net in the case of short-term emergencies to allow the investment plan to continue and maximize the effect of compounding on the money invested.

When determining the types of investment vehicles to utilize, the mix of assets should match the investor's time objectives and risk tolerance. There should be a diversification among different assets, such as stocks, bonds, and cash instruments (certificates of deposit or money market accounts).

Personal risk tolerance is important to consider, so the investor can better deal with the stress associated with fluctuations in the various markets. Diversifying by asset classes -- stocks, bonds and cash instruments -- decreases the chance that an entire portfolio will be affected by a sudden market downturn.

Regardless, diversifying the investments is necessary to be a hedge against inflation. If all investment dollars are placed in non-fluctuating vehicles such as bank certificates of deposit at five percent, and inflation is at three percent and the taxes on the earnings take two percent, the real rate of return is zero.

If an investor has access to a 401K account at work, conventional wisdom dictates putting as much money into the account as the company will match. Programs vary, but one could see a match of from $.25 to $1 on each dollar invested. If the company matches dollar for dollar, the return on investment is automatically 100 percent with no risk.

When picking a mix of investments, one useful formula starts by subtracting the investor's age from 100. The resulting percentage would be how much to put into high-risk investments such as growth mutual funds. The remaining percentage would go into a more conservative investment like a bond mutual fund.

Conclusion
Regardless of age, it is important to plan and invest for the future. Investors can and should take advantage of any and all tax-deferred instruments available. Formulating a plan and staying with it for the long term is the most effective way to accumulate the funds necessary to accomplish the financial goals they may have.