Investing can be overwhelming and confusing, but it doesn’t have to be! With the right investing approach and mindset, you can achieve your life goals and build a secure financial future. That’s where goals-based investing comes in.
Getting Started With Goals-Based investing
Goals-based investing is an investing approach that focuses on your specific financial goals. It helps you invest with clarity, rather just throwing money at Wall Street.
When you have a clear plan for your financial goals, you are less likely to make impulsive decisions based on emotions or market fluctuations. It gives you guardrails to make informed decisions about your investments and stay on track.
So, let’s get started! Here I’ll cover 7 steps that will get you from 0 to ∞ with goals-based investing.
The 7 Steps To Goals-Based Investing
1. Define Your Financial Goals
It’s time to get clear about what you really want! Defining your financial goals is crucial to making sure you’re putting your money to good use. Whether you dream of buying a house, saving for retirement, paying for college, or traveling the world, it’s important to put your aspirations on paper.
But first, let’s get a little philosophical. What do you really want out of life? What are your long-term dreams and aspirations? Once you know what you’re working towards, it’s much easier to figure out how much money you need to get there.
For example, if your goal is to buy a house, you’ll need to know the estimated cost, the down payment, and how much you’ll need for monthly mortgage payments. If your goal is to retire comfortably, you’ll need to know how much you need to save each month and how many years it takes to reach your target number.
if you’re drawing a blank thinking about your goals, check out my article How To Set Money Goals: Ultimate Guide where I share 30 personal finance metrics.
Making a list of your financial goals and putting a price tag on each is the first step to investing with clarity. And don’t worry if your list is longer than Santa’s – just prioritize!
Goals-based investing is an investing approach that focuses on your specific financial goals. It helps you invest with clarity, rather just throwing money at Wall Street.
2. Establish a Time Frame for Your Financial Goals
When it comes to investing, timing is everything! And no, I’m not talking about market timing but setting a time frame for your financial goals. But before we dive into the time frame, let’s talk about risk tolerance.
Risk tolerance is a big deal in the investing world. It’s like your personal spicy-food meter. Just like some folks can handle the heat and others can’t, some folks can handle a higher level of investment risk, and others can’t. And that’s okay! The key is to understand your own risk tolerance and make investment decisions that align with it.
So, how do you determine your risk tolerance? It’s actually pretty simple. Think about how you’d feel if you lost some (or all) of your investment. If the thought of losing money makes you break out in a cold sweat, you probably have a lower risk tolerance. But if you’re more of an “eh, it’ll bounce back” kind of person, you probably have a higher risk tolerance.
Once you have a handle on your risk tolerance, it’s time to set a time frame for your financial goals. The idea is that the shorter the time frame, the less risk you should take. So if you’re saving for a down payment on a house in the next year, you probably don’t want to be too aggressive with your investments. On the other hand, if you’re saving for retirement in 30 years, you might be able to take on a bit more risk.
The key here is to ensure the time frame and the level of risk feel comfortable for you. If the level of risk needed to achieve your goal within the time frame feels too much, then it might be time to extend it. After all, you don’t want to be constantly checking your portfolio and worrying about every little fluctuation.
And remember, investing is a marathon, not a sprint! So take your time, set realistic goals, and don’t forget to have some fun with it. Because let’s be real, who doesn’t love a good stock market joke? “Why did the stock go to the gym?” “To work on its portfolio!”
3. Assess Your Current Financial Situation
When it comes to goals-based investing, knowing your current financial standing is key. It’s like starting a road trip without a map – sure, you might end up at your destination, but it will be a lot bumpier and less efficient. By taking stock of your debts, assets, expenses, and income, you’ll be able to map out your current financial situation and determine what changes you need to make to reach your goals.
How to Assess Your Current Financial Situation:
- Make a list of all your debts, including credit card balances, student loans, car loans, etc.
- Make a list of all your assets, including savings, investments, and property.
- Calculate your monthly expenses, including housing, food, entertainment, and other recurring payments.
- Determine your monthly income, including salary, dividends, and any other sources of income.
Once you’ve gathered this information, you can get a clear picture of your current financial situation. And don’t worry. There are plenty of tools and products available that can help make this process easier. Some popular options include budgeting apps, financial calculators, and personal finance software.
Remember, the goal is to assess where you are now so you can determine the best way to reach your financial goals. It might not be the most exciting part of goals-based investing, but it’s an important step that can’t be skipped.
4. Develop a Plan to Achieve Each Goal
Having a plan in place is essential to achieving your financial goals. This involves budgeting and saving strategies, diversifying your portfolio, and making smart decisions about asset allocation and the right investment accounts, tools, and products.
Budgeting and saving are key components of a solid financial plan. Start by figuring out your monthly income and expenses and determine what you can realistically set aside each month towards your financial goals. This will help you stay on track and reach your goals faster.
Diversifying your portfolio is also important. This means spreading your investments across different asset classes, such as stocks, bonds, and real estate. This helps to reduce your risk and ensure that your investments are not overly dependent on any one market.
When it comes to choosing the right investment accounts and tools, there are many options to consider, including traditional brokerage accounts, robo-advisors, and even mobile apps. Some apps, like Betterment, make goals-based investing easy. So, do your research and find the products and services that work best for your goals and risk tolerance.
By following these steps, you’ll be well on your way to achieving your financial goals with confidence. Remember, investing is a marathon, not a sprint, so take your time, be patient, and stay focused on your long-term objectives.
5. Monitor and Rebalance Your Portfolio
Investing for your financial goals is all about balance, and that’s why monitoring and rebalancing your portfolio is crucial. It’s important to regularly assess how you’re doing and make any necessary adjustments. So, what exactly is rebalancing, and why is it so crucial for goals-based investing?
Rebalancing is simply the act of realigning your portfolio to match your target asset allocation. For example, let’s say your target is to have 60% of your portfolio in stocks and 40% in bonds. Over time, as the stock market rises, your stock allocation might increase to 70%. That’s when you sell enough of your stocks to return your portfolio to the target allocation.
Why bother with rebalancing? Research has shown that it can help you reach your goals faster and more efficiently. Regularly checking in on your portfolio and making small adjustments can help you avoid letting your investments get too far out of balance, which can be risky. It can also help you stay on track by ensuring that your investments match your risk tolerance and time horizon.
So, to recap, monitoring and rebalancing your portfolio is key to reaching your financial goals. It can help you stay on track and reach your goals faster and more efficiently. Just remember to keep an eye on the market and adjust your portfolio as needed to ensure it stays aligned with your goals. And who knows, maybe rebalancing will become your new hobby. (Or not, but it’s good for your investments!)
6. Stay Committed
Achieving financial goals is no easy feat, but the payoff is well worth it. The key to success is staying motivated and committed to your plan, no matter what obstacles or challenges may come your way. Here are some tips to help you stay on track:
- Overcome obstacles: Everyone faces setbacks, but it’s important to keep your eye on the prize. Whether it’s a sudden expense, a market downturn, or simply feeling unmotivated, it’s essential to stay focused and not let setbacks sidetrack you.
- Stay motivated: When you set financial goals, it can be easy to get discouraged when you don’t see immediate results. It’s important to remember that building wealth takes time and to stay motivated by focusing on your long-term goals. Celebrating small victories along the way can also help you stay motivated.
- Take small steps: Remember that it’s the small, consistent steps you take toward your financial goals that add up over time. Whether it’s consistently contributing to your retirement account, paying off a small debt each month, or simply making a budget, taking small steps can help you stay committed and make progress toward your goals.
By following these tips and being patient and persistent, you’ll be well on your way to achieving your financial goals through goals-based investing.
7. Seek Help If Needed
Investing in your financial future is not always straightforward, and sometimes you may need help to achieve your goals. When this is the case, seeking the help of a financial advisor can be extremely beneficial. A good financial advisor is someone who operates as a fiduciary, which means they always act in your best interest.
Here are some benefits of working with a fiduciary advisor:
- They take the time to understand your financial goals and risk tolerance to develop a personalized investment strategy for you.
- They provide you with a comprehensive financial plan covering all aspects of your financial life, from budgeting to retirement.
- They keep you updated on market changes and help you make informed decisions about your portfolio.
- They help you overcome obstacles and challenges while achieving your financial goals.
Conclusion
In conclusion, goals-based investing is a powerful strategy for achieving financial clarity and success. By setting clear financial goals, assessing your current financial situation, developing a plan, regularly monitoring and rebalancing your portfolio, staying committed, and seeking help when needed, you can create a roadmap to reach your desired destination.
Here’s a final tip: a goal without a plan is just a wish, so make sure you take action! And while the journey to financial freedom can be long, remember the words of the great philosopher, Will Rogers: “Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.”
So, don’t be that guy! Instead, start setting and achieving your financial goals today, and don’t forget to reach out for support and guidance along the way. Check out my Simple System to Achieve Life Goals. Happy investing!
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