Why is investing important?
Money is an essential part of everyone’s life. Usually, everyone earns and saves for their future. This is important since the savings from salaries and lump sum bonuses might not be enough to see one through their working and retirement life. Instead of investing, if these savings are left in your pocket, the money won’t grow. Investing is how money reproduces. Therefore, investment is very important for wealth creation. Here are a few other reasons why you should invest:
Not investing now has an opportunity cost. It can make you lose out on the potential gains you could have made by investing. Investing your money involves a tradeoff where you refrain from spending the money now for a potential higher utility in the future.
Diverse sources of Income
Stock investment can get you returns in the form of dividends or capital gains. Investing in a bond can benefit you through regular payouts or coupons. Investments made in real estate benefits an investor through capital gains and/or rental income.
The majority of people invest in having a peaceful retirement. As most of the earning population depends on their salary for meeting their needs, it can be difficult to sustain their lifestyle after retirement in the absence of investing. Therefore, it’s a good idea to invest at least a part of one’s income during their working years. This ensures a nest egg during the retirement years.
Investing is also known to help in saving taxes. There are accounts like the TFSA, RRSP, 401k, Roth IRA, and many others where the tax on investment is very low or non-existent. As the government has reduced its responsibility in offering funding for citizens during retirement, they have started these accounts so that the citizens can contribute and fund their retirement.
Investing plays an important role in overcoming inflation. If you haven’t invested your money, the money’s purchasing power will decline as inflation eats away the value of money. Due to inflation, the real return on your bank deposits (interest rate adjusted for inflation) may even be 0% or negative. In order to insure yourself against such situations, one can start investing in a mix of assets to help beat inflation.
Reach Your Financial Goals
Investing is the best way to achieve your financial goals. New financial requirements come up as an individual grows through life. In most cases, it begins with buying a house. Even if you are funding the house through a loan, a substantial down payment is required. An individual can build up the down payment required through his investments. This is just a simple example and there are many other ways where investment can help you reach your financial goals.
Create Your Investment Goals
Learning how to set investment goals is very important. It helps the investors in keeping track of where they were, where they are, and where they are going. These investment goals help in building a long-term roadmap towards financial freedom.
Saving money to buy something is a tale as old as the hills. Doesn’t matter if you are a ten-year-old wanting a new bike or an adult seeking a new house, we all have experienced trying to save up for something. These early experiences promote beliefs and habits that last a lifetime, although the challenges may multiply.
Though investments are a natural extension to savings, an analogy can be drawn between savings and investment in how both start with a goal in mind. Savings and investment both are habits best inculcated as an early age. You start with setting a specific financial goal. What do you want to achieve? How long will achieving it take? What are the steps for achieving it?
Once you’ve understood what is important for you, you will need to find out which goals are achievable in a short, mid-range, and long term. After this, you will need to develop a Specific, Measurable, Achievable, Relevant, and Timely (SMART) strategy along with a set budget for achieving it.
What are the investment goals?
Investment goals can be of various forms, but they are more concrete and not just generic notions. In most cases, investment goals are spread into three branches, depending on income, age, and outlook.
Income is the natural starting point for investment goals as it is not possible to invest what you don’t have. The outlook is the playing field on which you operate during your lifetime, the choices you make that impact the way you manage your wealth. Family planning and career are at the top of this list for most people. Fortunately, it is never too late to start investing. You may be in your 20s or 40s when you realize that life is moving too quickly and you need to start thinking about your retirement.
All investments begin with the first rupee set aside for it, whatever your income, outlook, or age. A few reasons to set investment goals may be:
Preserving your money or for maintaining your net worth.
Generating enough income so that it can supersede or replace your working lifestyle (retirement).
Potentially increasing the amount of active return your investment generates.
Defining an explicit purpose for investments.
While it is always easier to figure out the broad goals, narrowing them down has its advantages. Therefore, it can be beneficial to translate a goal such as aiming for financial stability or putting your kids through college, into the expected outcome in number terms. This will give you a more realistic perspective.
Why are investment goals important?
Although there are several investment options where you can start investing online within minutes, hasty investment decisions may not bear the desired results. If you are looking to be a successful investor, you cannot skip tying your investments with your financial goals.
A goal-less investment is like a ship navigating in the wide sea with no idea of the route and destination. If you are trying to understand the importance of investment goal setting, here are some important reasons-
Provides a Clear Vision
When you have a clear vision of your financial and investment goals, it adds confidence and clarity to your investment decisions. It helps in better control and management of your finances, keeping you prepared for the various phases of life.
Building Investment Strategies
Understanding the importance of goal setting helps in building effective investment strategies. Your investment strategies can be customized as per your requirements, keeping your financial responsibilities and expenses in mind. You will be better prepared for making informed financial decisions once you are sure about your financial and investment goals.
Motivation plays an important role in life. There is a lot of motivation when you know your target. It also encourages you to work harder for it. Motivation also has a positive impact on your earnings and helps you in making better decisions when it comes to your professional life.
Makes Asset Selection Easier
Different investments types suit different risk appetites and time horizons. So, with a set investment goal, it is easier to select the best suitable form of investment for you, as you know what you want from the investment and how much time you have to achieve it. For instance, if you are planning to buy a house next year, you will know that direct equity investment is not right for you as it is slightly riskier and mostly recommended for long-term goals.
Steps in making an Investment Goal
These steps will help you in understanding your investment goal:
Assess Your Current Situation
The first step in making an investment goal is to define your present financial condition. You need to know how much money you have for investing. You can assess your current financial situation by making a budget for evaluating your disposable income after expenses and emergency savings (if you have any).
You must also consider how accessible, or liquid, you require your investments to be. This will help you in figuring out how much and where you can afford to invest.
Define Your Goals
The next step is to define your financial goals. This requires answering questions like why am I investing?, What do I want the extra income for? It can be anything from buying a car to retirement planning.
You also need to define a timeline – How quickly do you need to earn money from the investments? Define the time horizon over which the liquidity event needs to occur.
Your goals can be summed up in three main categories: short-term, mid-term, and long-term financial (Discussed in detail later on in the article). It is an important step toward financial security. If you are not working towards a specific goal, you may end up spending more than you need to.
Determine Your Risk Tolerance
The next step in crafting an investment goal is deciding the ability and willingness to take risk. Ability should always supersede willingness. Normally, you can take more risk the younger you are, as your portfolio has a lot of time to recover from the losses (if any). If you are older, it is advised to invest in less volatile instruments. Typically the portfolio weight shifts from equity to bonds with age.
Decide where to Invest
The final step is deciding where you should invest. Your budget, goals, and risk tolerance will guide you towards the best types of investment. Make sure to diversify your portfolio wherever you decide to invest.
For example, you do not want to put all of your money into stocks as it puts you at risk of losing if the stock market crashes. It is always best that you allocate your assets to a portfolio to variou instruments that match your goals and risk tolerance, as it maximizes your growth and stability.
Monitor Your Investments
Once you are done making your investments, it is not advised to leave them alone. You must check how your investments are performing and then decide if they need rebalancing. This will help you in determining if you are on track for reaching your goals or if the portfolio needs any adjustment. Depending on how the investment is performing, the expected risk-reward may get out of order and might need a revamp.
You must go through these assessment steps, preferably every quarter, to ensure everything is working according to your plan. You should make any necessary changes and adjustments to continue to work towards your goals.
Long, Mid-term, and Long term Financial goals
So how can you figure out investment goals which suit your needs? Putting yourself in the right frame of mind makes it easier to get started. In simpler terms, you must be proactive about the financial factors that influence your life.
Visualizing the future you need is the first step towards achieving it. Here are Short, Mid-term, and Long-term goals that financial experts recommend setting up for a systematic approach.
Short-term goals are narrow in scope and have a very limited time horizon. However, short-term goals help in adjusting your spending habits and gaining control of your budget. Short-term goals include getting away from unnecessary spending. It can also give you a confidence boost and the foundational knowledge that you need for achieving larger goals that take more time.
Short term goals are relatively easy to achieve. Here are a few short-term goals that will help you right away, and get you on track for achieving your long-term goals.
- Purchase of furniture
- Home improvement
- Creating an Emergency Fund
- Paying Off Credit Cards
- Planning a short vacation
- Purchasing sport gear
Once your budget is created, an emergency fund is established, and the credit card is paid off, or at least you have made a good dent in your short-term goals— the time comes for working towards mid-term financial goals. These goals act as a bridge between short and long-term goals. These goals may take 3-5 years to achieve.
It is advised that you use SMART planning. You need to avoid setting your sight too high as it may lead to frustration and then failure. Examples of mid-term financial goals can be:
- Saving for a down payment on a house
- Starting a business or a new career
- Paying for a wedding
- Taking a dream vacation
- Getting a Life and Disability Income Insurance
- Paying Off Student Loans
Long-Term Financial Goals
The supreme long-term financial goal is funding for a comfortable retirement. The rule of thumb is that you need to try and save 10-15% of every paycheck. This saving must be put into a tax-advantaged retirement account like a 403(b), Roth IRA, or 401(k). To make sure you are saving enough, you will need to find out how much you’ll need after retirement. This can be done by:
- Estimating Retirement Needs
- Estimating desired annual living expenses during retirement.
- Subtract the income received.
Other long-term financial goals can be:
- Living debt-free
- Paying off your mortgage
- Getting your kids through college debt-free
- Building an estate
- Leaving a legacy to a favorite nonprofit.
Execution & Monitoring
Based on the specific investment goals defined, you need to select the appropriate asset allocation model which has the risk-reward profile in-line with the goals and the timely liquidity cycles to meet your requirements. It is also important to review the investments on a ongoing basis, measure the delta between the expected returns and realised returns and course correct.
The bottom line:
You may not always make linear progress towards achieving all your investment goals, but what matters is being consistent. You may get hit with an unexpected medical bill or car repair because of which you need to take some money out- don’t beat yourself up for it. All you need is to get back on track as soon as you can.
That’s the beauty of planning: You can always review and update your investment goals. You can monitor your progress and reach them through the ups and downs of life.
Also, keep in mind that it is best to set investment goals as early as possible. This is because waiting for too long may introduce complications that may be difficult to overcome. Investment goal-setting, planning, and it’s execution require a level of commitment and discipline that may make you uncomfortable. You can start small if you find the process to be overwhelming. Remember that investment is a lifetime event and it demands careful planning at every stage, but the payoffs are equally rewarding.