Set your financial goals!
If you’re here, it must mean that you are keen on investing your money. Investing means to put your financial resources ($$$) into an investment in the hopes that it gives you more financial resources (we call this a ‘return’) in the future. Now, I get asked a lot of questions about investing. Most of the questions sound like this:
“What should I invest in? Stocks or property?”
“Hey, do you think I should buy shares in XYZ company?”
“Should I invest in crypto-currency??”
That last one especially gets asked A LOT lately.
Often my response is the same:
“Before you invest, you need to set your financial goals,”
Previously, I have written about a brief overview of investments. But today, we will talk about the first thing you need to do before you can even start investing:
Set your financial goals
Let’s talk about financial goals. Financial goals are closely tied to various milestones in your life. These financial goals are met when you have the financial ability to achieve certain life goals such as:
- Buying your first car
- Living on your own
- Buying your first home
- Starting your own business
- Retiring comfortably at the age of 65 (for example)
Looking at the list, we can see that at different stages in our life, we may have different goals. This is the most important lesson here – no one individual has an exact same list of financial goals as another individual at any given time. Hence why it is VERY important to consider what your personal financial goals are.
A 21 year old student who is just graduating and looking for their first job will have very different goals to a 45 year old manager who is planning to retire in 10 years. The 21 year old may be looking to save up money to buy their first car. The 45 year old may be looking to build up a savings fund for retirement. The types of investments that works best for them will be very different.
Over the course of our lives, we will have different financial goals. When investing it is always best to consider the order in which you want to achieve these financial goals. This brings us to our next topic:
Planning your financial goals
Let’s take the example of Jerry, a 30-something office worker who has been working 5 years in the industry.
Like many 30 year olds, Jerry is looking to save up enough money to buy his first house. At the same time, he also has other more distant financial goals, such as buying a fancy new Tesla Car, paying off his student loans and retiring by the age of 60. So let’s say that Jerry’s goals looks like this:
- Save up first home deposit
- Pay off student loans
- Pay off first home mortgage
- Buy Tesla
- Retire by age of 60
Now for each goal, he needs to set himself a timeframe within which he can achieve that goal:
- Save up first home deposit – 3 to 5 years
- Pay off student loans – 8 to 10 years
- Pay off first home mortgage – 15 to 20 years
- Buy Tesla – 10 years? (assuming Tesla is still a hot brand by then)
- Retire by age of 60 – 30 years
Based on the timeframe that he has given himself, Jerry can then start planning out his investment strategy.
Your investment strategy
Your investment strategy is your own. It is no one else’s. You are responsible for planning it, executing it and ultimately OWNING it.
Now let’s say Jerry has $20,000 saved up from working over the past 5 years. From here he can start calculating how much more he needs to aim for his first financial goal – saving up for his first home deposit. The bank tells him that he needs $70,000 for a 10% deposit on a mortgage. This means he needs another $50,000 saved up.
How will he build up this $50,000?
First, he can put more of his income towards savings. Assuming he can put $10,000 a year towards his savings, he can get there in 5 years. But then again, consider that he is aiming to get the first home deposit in 3 to 5 years – this means he can look at investments that will give him secure returns within those 3 to 5 years. This means that instead of just chucking his income into a savings account, he can start investing that money and draw on it when it is time to get that first home deposit.
He will want to aim for a low to medium risk, investment which will give him a decent return over 3 to 5 years. This is better then letting his money sit in a savings account, earning a really low amount of return (which barely covers inflation).
At this point, you may ask:
“What sort of investments should I be looking at based on my financial goals?”
And that is a really good question. But to answer that question, we need to first understand the relationship between risk and return in our next article!
For more information on being money-wise, check out Sorted!
In the meantime, start thinking about your financial goals and as always,
Stay positive!