The key to creating meaningful wealth and financial vitality is building a financial framework that will do everything from mitigate the blow of a financial emergency to catapult you to reach the goals you’ve always had. Wherever you fall on that spectrum, there is a way to incorporate effortless investment strategies into your monthly savings plan.
Now, if you don’t have a monthly savings plan yet, don’t worry. You can start today, you just
need to start. Regardless of where you are in the process, approaching your savings plan
intentionally is what will make all the difference. Let’s simplify the process of goal-based investing strategies. The whole saving and investment process will become so simple, yet effective, that you could start formulating your investment plan, right after reading this blog post.
What is Goal-Based Investing?
The objective of goal-based investing is to invest with the aim of achieving specific life goals. It’s about being very intentional with your money, and it requires you to have a vision for what you want your life to look like a year, five years, even twenty years down the line. This relatively new wealth management framework is inspired by reverse-engineering the goal and keeping the end result in mind. Investments that are goal-based involve clients measuring their progress towards specific life goals with or without the help of a wealth manager, depending on how big the goal is itself.
Maybe you’re looking to save with the intent of sending your kids to college without having them take out student loans. Maybe you’re building a retirement plan, or even starting a side hustle. If you look at the bigger picture, it’s always intimidating. But, if you break those goals down into smaller parts, it reveals a path to get there.
Understand the WHY behind your investments and your savings.
Many people struggle with investments because they’re coming from a place of fear.
The fear of losing money.
The fear of not being able to provide for your family.
The fear of ending up like so-and-so.
This fear is a result of establishing non-specified goals with no end result in mind. We’ve all
been there at some point, and if you approach it with this paradigm, you’re setting yourself up for failure every time. Instead, replace your fear with desire. It’s basic psychology. If you perform a behavior to avoid a bad outcome, you’ll end up losing perspective. However, if you perform a behavior to acquire a want, need, or desire, your focus will become steady.
Here is a free, useful tool to help you understand the WHY behind your savings and your
investments. Use this template to gain clarity on the why behind your goals so you can become crystal clear on the right motivator that is driving your investment decisions. From there, consider your timelines.
Identify Short Term vs. Long Term Goals
Once you’ve become clear on the reason behind your savings, you can set goals based on the different phases of your life to come.
Short Term Goals [0-3 years] – Lower Risk
These could be emergency funds, savings for large purchases, travel funds, and vacation expenditures. These are the funds you want to have access to help fund your adventures, the remodeling of your bathroom, maybe an emergency room bill that pops up. Start here. Do not go through life without a foundation that will catch you when you fall or will enable a quick getaway when you need it most. Your goal should be to get this to 3-6 months of your monthly income before you move on to investing in other ventures.
Long Term Goals [10+ years] – Higher Risk
These can be retirement funds, college savings for kids, building a second home in 10 years, getting a cottage in the mountains, buying an RV, etc. What inspires you? Get creative and eliminate the how – just think of what you want for yourself and your family. There will, more often than not, be a route to get there with the right approach.
Intermediate-Term Money [no specified time frame] – Moderate to High Risk
Sometimes, a goal cannot fit into the timelines listed above. This is where I help my clients with intermediate-term money, typically falling under moderate to higher risk. This might be play money or more aggressive savings that don’t have a specific goal attached other than building wealth. The important part is that it complements your other investments.
My Own Experience With Intermediate-Term Money
I personally have an investment account that doesn’t really have any objective tied to it. It’s part savings-account-part-investment account. We add to it every month and invest accordingly. This account is used for big purchases, like a Peloton for example, that my wife and I both agree on. It also serves as a vacation account that we dabble into whenever we take a big family vacation. The goal of the account is to increase the value each year after we tap it. This can only be done through growth and saving.
How To Begin Goal-Based Investing Plan
1. Determine the time frame and amount of money needed
We cannot treat each goal the same way. Your goal could be to create an emergency fund, buy a car, or plan for retirement. Do all of these goals have the same timeline? Probably not. Can you indulge in these savings anytime like an out-of-the-pocket expense? No. When you have a time frame in mind for each goal, it not only gives you a timeline that will help you get there but also makes you cautious of cashing out on those funds in a moment of weakness.
2. Cost Estimation
Once you’ve estimated the time frame, let’s estimate the amount you need to save. What are
the numbers? For example, if you’re looking to save money to buy a car in the next three years, you will need to calculate the inflation rate and add that amount to the price of the car in the current year. Voila – you have your exact number, right there. It is wise to guess if the price of a particular item will increase or decrease in the future and prepare your financial plans accordingly.
It is never too late to start investing.
You can figure out the exact number you need along the journey, but as soon as you have a
goal in mind, that’s your cue to start putting money in a separate savings account. The sooner you start your investing journey, the better the possibility of achieving your goals with lower amounts of investment increases.
Things To Remember
Blanket investment strategies do not exist.
Different goals require different time frames, so a blanket investment strategy isn’t appropriate. Depending on your goals, some may be achievable in the short term, while others will be feasible in the medium or long term.
One financial goal cannot be the basis of an investment strategy for all your goals. Depending on your risk tolerance, you may need a combination of different investment products and strategies to achieve all your goals efficiently.
Savings alone are not enough.
You need to be smart about choosing your options. If you’re choosing to invest in something that might depreciate in another two years, or you decide to put all your savings into cryptocurrency without the proper guidance, it’s likely that your goals will not bear fruit in the long term. Be smart, and be intentional.
Evaluating expenses is crucial.
Before you begin your investment, you should determine how much surplus you can invest, depending on your monthly income. You may realize that not all goals are feasible with your investible surplus. So, you can either postpone that goal, change the target or you can try to increase your investing power by starting a side hustle for savings purposes.
The goal-setting approach allows people to observe their investments through different lenses and helps manage ups and downs without feeling the shake. When you’re expecting the outcome, the time frame, and the exact amount you should be putting aside each month, it becomes almost mathematical to reach your goal.
Applying different risk measures that are tied to goals ensures that necessary diversification is met. It also allows the investor to consider the why behind their savings, which creates more likelihood of success.
What’s your biggest takeaway from goal-based investing strategies?
Are you the kind of person who would try to increase their investing power or give up on one goal altogether if your monthly savings aren’t enough due to limited income?
Take advantage of a free consultation from Four Points Wealth Management. We can help you personalize a financial strategy to get you where you want to go. If you have any questions, feel free to reach out to me, and together, we’ll create a plan that sets you up for success.