How to set investing goals?

Goal-setting is a vital step toward reaching financial success, especially when it comes to investing. Setting specific, achievable goals can help you to narrow your focus, create a plan, and stay motivated along the way.

In this guide, you’ll learn the importance of goals, what makes a good investment goal, questions to ask yourself when setting them, and some next steps to take.

Why goals matter?

Studies have shown the significance of setting goals in reaching financial success. One well-known example that continues to be referenced is a 1979 study conducted by and of MBA students.

Of the graduating students, only 3% had written goals and plans to accomplish them, 13% had unwritten goals, and 84% had no goals at all.

After 10 years, the students with unwritten goals were earning an average of twice as much as those students with no goals at all.

The small percentage of students with written goals were earning 10 times as much as the rest of the students combined.

Goals provide many benefits toward achieving financial success, including providing clarity around what you want, offering motivation, and creating a clear and specific plan to follow.

When investing, having goals in place can help individuals take the first step toward something that feels new or overwhelming to them.

What makes a good investment goal?

The most common rule of thumb that experts recommend for goal-setting is the use of SMART Goals. It is a mnemonic device that stands for the following:

Specific: Setting a specific financial goal requires identifying how much you plan to save and the purpose you plan to save it for.

Measurable: Financial goals are often easy to measure. There’s a specific dollar amount attached to them, and you can clearly see how close you are to reaching yours.

Achievable: While it’s okay to set lofty goals, setting goals that aren’t achievable can lower your motivation and pull resources away from other goals that you can reach.

Relevant: A good investment goal should align with your broader goals and values.

Time-Bound: Attaching an end date to your goal not only provides some sense of urgency but also helps you calculate exactly how much you need to save monthly or weekly to achieve the goal.2

 Questions to ask when setting your goals

When you’re setting financial goals, there are some guiding questions you can ask yourself to help craft an investment plan and ensure that you’re on the right track.

Taylor Jessee, a certified financial planner (CFP) and the director of financial planning at Taylor Hoffman Wealth Management, shared a few questions that investors can ask themselves:

What do I plan to do with this money?

For example, is it for buying a house, sending a kid to college, [or] saving for retirement [that] is years or decades in the future? Jessee said.

In general, it is best to separate your money into different buckets for different goals, because your investment approach should be different for each, she added.

When do I expect to need this money?

Your time horizon is the number of years before you plan to need your investment money, and it’s an important part of building your investment strategy. The longer your time horizon, the more aggressive you can usually afford to be in your portfolio.

How much risk am I comfortable with?

While general rules of thumb can apply to most investors, everyone has their own risk tolerance, and their investment portfolio should reflect that.

“There are no guarantees when you invest (in anything, not just the stock market), so [think about] how much you are comfortable losing if it doesn’t turn out the way you hope,” Jessee said.

Measuring Your Progress

Your work isn’t over once you set your financial goal and build your investment portfolio. It’s important to track your progress to ensure that you’re on the right track.

“The easiest way to track and measure progress toward goals is to use an app or online financial planning tool,” Jessee said.

As you measure your progress toward reaching your goal, you should also be prepared to change your strategy if what you’re doing isn’t working. In many cases, you may need to change your investment strategy or increase the amount you’re saving each month.

Source: The Balance website