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Setting Financial and Investment Goals Thumbnail

Setting Financial and Investment Goals

Have you ever set financial and investment goals for yourself with the best of intentions of achieving them, only to find yourself derailed after a few months or poor decisions? If so, you're not alone. Just look at how many people start the New Year off with a brand new gym membership, only to stop going after a few months.

Let's get back to the basics of financial and investment goals and, more importantly, an investment strategy so you can set yourself up for success.

What Are Financial Goals?

At first glance, this section may seem a little silly. The definition of financial goals seems self-evident. But sometimes, it's easy to only look at the money-related goals (wanting to save $20,000 this year) and not the money-required goals that accompany the rest of your life (buying a house, investing activities, and planning for a comfortable retirement).1

When you start to identify some of your financial goals, it's important to figure out which goals fall under short-term financial goals and which of your goals require a more long-term plan. In general, short-term goals are defined as any goal that will take three years or less to complete, while long-term goals may take three to five years to complete or even longer.

Why is it important to identify a time frame for your goals? If your goal is to have $10 million saved in your retirement account by the time you're 65, staying motivated for a goal that feels so far away can be hard. By having a mix of short and long-term goals, you'll be able to build up successes to keep focused on the goals that will take a little longer. It can also act as a guild to help you understand your progress in reaching your long-term goals.

Financial Goal Setting

Now it's time for the real work. When it comes to identifying your financial goals, leave no stone unturned in every area of life. What does your dream life look like, and how similar is it to the life you lead now? Where are the disparities? Most importantly, are you and your life aligned with your current financial goals? And if not, what do you need to do to close the gap?1

The importance of getting clear about the kind of life you want to live and writing it down is two-fold. First, you'll have a written record of what you want to do rather than have ideas floating around in your head. Again, this seems like a simple tactic, but it makes a difference to see your goals in writing in the physical world. Once they're down on paper, you can start to examine which parts of your life match, which ones don't, and start to close the gap. The second reason is that having something to hang onto is important when the going gets tough. Life happens, and without fail there will be some speed bumps along the way. Writing down your goals can keep you focused when the road gets rocky.2

Investment Goal Setting 

When it comes to setting investment goals, it is important to remember that markets are volatile, 2022 has certainly proven that to be the case, and losses can occur. However, looking at how markets have performed after a bear market--when the market falls 20% from a 52 high--time in the market is the winner. If you have already invested and a bear market begins, some may be tempted to sell and get out of their investments, but they will be risking benefiting when the markets recover.
Setting investment goals can be easily done on paper.

For example, you have $500 that you would like to turn into $5000. That is a great goal, but no matter the goal or amount of money you want to invest, without an investment strategy in place, you may invest in far too risky investments and lose the whole lot. Setting an investment strategy consists of understanding your time horizon, risk tolerance, and liquidity needs. Further, you can use different investment strategies for different portfolios with specific goals, such as investing to save for your children's education, retirement, or a dream home.

Determining Your Investment Strategy

As we mentioned above, you will need to determine your strategy. Investors with longer timeframes may be comfortable with investments that offer higher potential returns but also carry a higher risk. A longer timeframe may allow individuals to ride out the market's ups and downs. However, a long-term capital preservation strategy looks to preserve the value of the wealth over a long period of time by growing it with less risk. This strategy does not ensure losses will not happen, but it seeks to steadily grow the wealth with lower levels of risk so that the wealth holds its value.

In terms of risk tolerance, an investor with higher risk tolerance may be more willing to accept greater market volatility in the pursuit of potential returns. Conversely, an investor with a lower risk tolerance may be willing to forgo some potential return in favor of investments that attempt to limit price swings.

In terms of liquidity needs, you will need to plan ahead to know if you will need access to pay for expenses in the near future, like the birth of a child. Once you see what liquidity needs you have, and if you can regularly invest money you will not require, you can determine what strategy to use, whether it be growth, value, capital preservation, or others. You can learn more about this by reading our blog here on "Building A Wealth Worthy Portfolio."

Setting SMART Goals

Now that you have clarified your goals, strategy, and dreams, it's time to figure out how to make them a reality. Sometimes this is an easy thing to do, like canceling a subscription you no longer use, or calculating how much it will cost to spend two weeks in Bali.1

One of the easiest ways to turn your goals from dreams to reality is to use the SMART goal method. SMART is an acronym that stands for Specific, Measurable, Achievable, Relevant, and Time-Bound. By applying this metric to each of the goals you've defined above, you can create a simple plan for each one.1 

Let's use the example of saving for a trip to Bali. A few actions that you can take is to find the best time of year to travel to Bali, research the costs of flights and accommodations, and decide what activities you want to do when you're there. But that doesn't necessarily mean that you have an actionable plan to make this happen. Here's how we can apply the SMART method:

  • Specific: I want to invest and save for my dream vacation in Bali. I have estimated this trip will cost $5,000.
  • Measurable: Broken down, this means that I need to save roughly $97 per week or $388 per month for the vacation. The leftover money can then be invested.
  • Achievable: My current budget has $1,000 of disposable income per month, which allows me to set aside the required funds. Planning to save for emergencies, I can set aside $250 a month and invest $362 each month. 
  • Relevant: Based on my income and expenses for the past year, this should be achievable.
  • Time-Bound: I want to achieve this goal within the next year.1

Now that you have identified a SMART goal, it's time to get started. Make it as easy as possible to save by setting up automatic transfers to a special savings account that you know you won't dip into when a sale at Nordstrom tempts you. Track your progress, celebrate your wins, and know that a year from now, when you're lounging on a pristine beach, you'll have proof that you can set and achieve your financial goals.

Whether it's paying off debt, saving for retirement, funding education, or your dream trip, setting financial and investment goals/strategies will help you build the life you've always wanted.

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  1. https://www.thebalance.com/best-financial-goals-2385552
  2. https://www.inc.com/geoffrey-james/what-goal-setting-does-to-your-brain-why-its-spectacularly-effective.html

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.