Investing is one of the best ways to build wealth over time. It’s one of the few ways that you can put your money to work for you in a way that allows you to take advantage of compound interest to the degree that it overcomes inflation. On top of that, if you start early and invest often, you have a good chance of amassing wealth over a period of decades in a way that’s manageable and accessible.
However, once you get into the habit of investing, it’s time to move forward and think about what you want to accomplish with your money. One of the best things you can do for your future is to set investing goals that make sense for your situation. Your investing goals can help you build a portfolio that works for you, as well as help you set your sights on a more productive and successful future.
Too often, investors just set money aside without a clear idea of what that money should be doing — or when it will be needed. Without these goals, it’s much harder to create a comprehensive plan that can result in long-term success. On top of that, it’s easy to become discouraged about investing and reduce your efforts when you don’t have a goal. If you can’t see why you are doing something, you’re less likely to stick with it.
How to Set Investing Goals
Setting investing goals is much like setting any other financial goal. Your first job is to determine where you stand right now. How are your finances? What can you set aside for the future? Do you know how much risk you can tolerate? Get an idea of your current picture so that you have a starting point.
Once you understand where you’re at right now, it’s time to decide what you hope to accomplish with the money you set aside. Do you want to be able to retire at age 55? Perhaps you want to be able to help your child pay for college. Maybe you just hope to create an emergency fund that works for you. What if you just want to build your assets to the point where your investment cash flow offers a fairly reliable stream of income.
Decide, specifically, what you hope to use the money for. This will give you a place to start from as you move forward. The reality is that you will need a different approach if you want to build up money in a 529 for your child’s college education in 10 years than you would use for your retirement in 25 years. Investing for eventual income is different from building up a massive nest egg that you hope to use later.
Another consideration is that sometimes you might work for multiple ends at once. I’m saving for retirement, but I’m also putting money in my son’s 529 plan each month. You’ll have to prioritize. I put more money toward my retirement goal than my son’s education because he has other avenues beyond me for his education. I prioritized my long-term savings, and other items, from the 529 to the travel fund, are secondary.
Once you figure out what you want your money to accomplish, you can begin setting sub-goals for your investments so that you can break things down in a way that makes everything more manageable. I didn’t start out by investing enough to max out my Roth IRA. However, I set a goal to invest a set amount, and then increase it incrementally until I reached the point where it could be maxed out. It took me about three years to reach that point. In the meantime, I kept putting a smaller amount into my son’s 529. Once my income grew and I changed my spending priorities, and I maxed out retirement contributions in the Roth, I increased what I was putting toward the 529.
You can create a workable plan that fits your budget, and then make it a point to increase your efforts as you are able.
Tweak Your Investing Goals
As you consider what needs to happen in order to reach your investment goals, you should take into account your timeframe. If you have a longer timeframe, you probably don’t need to set aside as much money each month, and you can take more risks with your asset allocation. If you have a shorter timeframe, though, you might need to set aside more money to reach your goal, and you might need to use more conservative investments in order to ensure that you don’t sustain big losses just before you need the money.
Once you figure out what needs to happen with your investments, you can tweak your investment goals in a way that makes sense. The best thing you can do is put together a plan that involves automatic investment. That way, you can be consistent in your investing. Long-term consistency in adhering to your goals is vital. Sticking with the plan is important if you want to avoid locking in losses during times of market downturn.
Also, don’t be afraid to re-evaluate your goals regularly and change things up a little bit if you need to. If you find that something isn’t working, you can make small adjustments. Additionally, as your financial situation improves, you might find that you can increase the amount of money you invest. Make sure there is room in your investing goals for improvements and changes. You don’t want to overhaul your plan every year, but it does make sense to rebalance every now and then, and make tweaks to your goals so that you remain on track.
Knowing that your money is going toward your future comfort, and helping you reach desirable goals can help you stay motivated — and even encourage you to change your overall priorities to focus on your financial future.