- Goal-based investing
- There are many ways to tackle investment goals. Some investors prefer a dynamic approach of generating the highest possible yields merely to beat the market. Other investors might prefer to manage their portfolios using goal-based investing.
- The main idea behind goal-based investing is to identify what drives you to invest your money. Typically this is a particular life goal - like saving up an emergency fund or eliminating credit card debt - instead of focusing solely on annual returns.
- When you have measurable goals, it's much easier to gauge your progress on your personal finances. Plus, you'll be able to consider each goal separately regarding timeline and risk tolerance so that you can invest wisely.
- Setting your investment goals
- The best investment goals typically have a few things in common. As mentioned previously, goal-based investing is rooted in creating measurable goals. The more specific your goals, the better you can determine whether you will be successful or not.
- For instance, you can set a goal of saving up $5,000 for a vacation on your next wedding anniversary. Since you have clearly defined how much money you need, and when you need it by, you can determine if you have achieved it. You either saved up $5,000 in one year, or you didn't. By contrast, setting a goal of "saving more money each year for travel" is impractical because it's not measurable. You will never know if you reached your goal because the goal doesn't hold you accountable.
- Having measurable goals is important, but the best investment goals are rational and attainable. You can aim to have vacation money saved up next year, but it might not be reasonable if your rate of saving is too low.
- For example, if you can only afford to invest $200 per month to your goal, it becomes unattainable. Based on a probable rate of return you'll end up with about $2,600 for your vacation. In this case, the shortcoming might not be life-changing, but not meeting critical financial goals (like your retirement nest egg) can be.
- After setting goals, you'll have to gauge what it takes to reach them. By using the right resources, you can determine if your plan is reasonable and attainable. In some cases, you may have to decrease your expectations, take on more risk, increase your deposits, or change your timeline to make a goal more realistic.
- Finally, you'll have to decide how much involvement you want in your wealth management. Some people like to work with a financial advisor, while others prefer to manage their own portfolios.
- With an advisor, you'll be given options based on your goals, timeline, and risk tolerance. You won't have to spend as much time researching companies or industries. In exchange for the hands-on guidance, you'll be charged a percentage of your capital under advisory. If you have a busy lifestyle and less time to reach your goals, hiring a financial advisor could be beneficial.
- The alternative of being your own advisor is possible too. You'll have to put in the time and effort into learning the market, but it can pay off substantially in the long run. When you become your own advisor, you can have a better understanding of what makes a good investment while keeping a higher percentage of your earnings. When you have ample time to meet your goals and feel passionate about the process, being your own advisor could be favorable.
- Whichever approach you choose, the way you invest your money will revolve around your investment goals. You'll likely have short-term goals along with mid- to long-term objectives as well. In the next section, we'll go over some common goals and the typical outlook for achieving them.
- Don't forget to bookmark this page and save it to the home screen of your smartphone. You can return to measure the progress of your investment goals throughout life. If you found this page useful, please promote us on social media by using the share feature.
- Common Investment goals
- Investment goals are usually split up according to the timeframe an investor has to reach them. Goals can be short-term, mid-term, or long-term and it's important to have a dollar figure for each. When you invest for something that's happening 20 years into the future, you have plenty of time to ride out any volatility in the market. By contrast, an investor that is realizing a goal in 2 years would probably prefer to have more stable (or liquid) assets to preserve his or her gains. See the table below for a sample of how to arrange your investment goals.
Short term goals
Mid range goals
Long term goals
Emergency fund: $10,000
Home down payment: $50,000
Plan for an early retirement: 2,000,000
Travel allowance: $5,000/year
Start a business: $20,000
Save up for your kid's higher education: $50,000
Pay for your wedding: $10,000
Renovate your home: $30,000
Charity donations: $100,000
Pay off credit cards: $6,000
Prepare for a baby: $20,000
Buy a vacation home: $50,000
Buy furniture or appliances: $8,000
Buy a car: $40,000
Pay off your student loans: $35,000
- Writing down your goals according to your timeline makes them more tangible. It's also easier to share your plans with an advisor or family member when you have them clearly listed out. By adding a dollar figure to each goal, you set a clear and concise expectation of your (or your advisor's) efforts.
- Your goals over time
- The goals you come up with when you begin investing are likely to change as you go through different stages in life. Eventually, you'll cross off short-term goals and replace them with your mid-term goals. As a result, you'll probably want to revisit your goals regularly to account for any changes in your life situation. Typically, it's best to review your investment goals on a yearly basis.
- For example, when you are just starting out in your career, you'll probably want to save up about three months of your income for an emergency fund. As you get older and expand your family, you'll want to double or triple that emergency fund - creating a new short-term goal. Then when nearing your long-term goals, you'll want to re-allocate your assets to reflect the next transition in your life.
- Using the calculator
- The calculator is very easy to use and is designed to help you analyze your investment goals. You'll need to include some information about your goals to see if you are on track to achieving them. Let's review the questionnaire together.
- Step 1. On the first line of the calculator you can start by documenting your investment goal in dollars. You can use the arrow keys or your keyboard to make this easier.
- Step 2. Next, you can add the amount of your initial investment. This is the money you have already put towards this goal.
- Step 3. On line three, include the rate of return on your investment, followed by the number of years you have to save towards your goal.
- Step 4. If you plan on making regular deposits to reach your goal, add it to line five of the calculator. Then determine the frequency of your deposits on the following line using the drop-down menu. Typically, it's easier to make small periodic deposits as opposed to one large investment from the start.
- Step 5. If you are making regular contributions, you should specify if your deposit is made at the beginning of the period by selecting the checkbox. If the deposit is made at the end of the period, leave the box unchecked.
- Step 6. The next part of the questionnaire you'll have to add details about your taxes and the rate of inflation. On line eight of the calculator specify the expected rate of long-term inflation.
- Step 7. Then, add your federal income tax rate, along with your state tax rate.
- Step 8. Proceed to your results.
- Once the questionnaire is completed, you can view your dynamic results.
- To the right of the inputs, you can see the value of your investment according to your time horizon. We provide you with the tax-deferred total, along with the worth after taxes, and how inflation could impact your earnings.
- For more detailed information, you can view the integrated reports. The first tab provides you with the balance of your investment over time. You can hold your mouse over any point of the graph to get an exact reading of your balance. The next tab, investment result by year, summarizes the balance of your investments each year.
- With this information, you should get an idea of whether your investment goals are reasonable and if you have the right plan in place to attain them. If your plan is not on track to reach your goal you have a few options:
- 1. Decrease your expectations
- 2. Increase your regular deposits
- 3. Take on higher-risk investments
- 4. Or, increase your time horizon.
- Ultimately, the best course of action will be highly personal and dependant on your investor profile. Happy investing!