Investing Goals

What are your financial goals? How do you go about setting financial goals?

Important questions!

Goals are simply things that we decide we want to do or achieve in a certain timeframe. Setting meaningful financial goals may be the smartest thing you do that will lead you towards financial freedom. Goal setting plays such an important and integral part of the investing journey.

Investors may spend a considerable amount of energy and time focusing on their financial situation but the majority won’t have specific financial goals. They may have heard about the importance of goals but probably haven’t spent the small amount of time needed to really focus on the specifics.

Let’s explore why goals are so important in a little more detail, lay out the goal setting process and talk about the different timeframes that you may want to consider when planning your financial goals.

 Why are investing goals important?

Investing goals are important for several reasons:

Direction – financial goals provide direction and meaning for your investing efforts. They make it easier for you to make sacrifices or stick to a budget because you know what outcome you’re striving for. They help you keep focused on the long-term.

Motivation – financial goals provide purpose and energy and help you stay disciplined in your investment process. Your goals should be important to you so that they provide the inspiration for you to keep on working towards them.

Accountability – writing down your goals and being accountable (whether it is just to yourself or to some significant other person) for your progress keeps you honest about how you are progressing. Regularly reviewing your goals helps keep you on track.

Accomplishment – reaching your financial goals provides you with a sense of accomplishment and you should celebrate significant milestones.

  How do you set goals?

Goal setting does not need to be hard work. It is a fairly simple process and can be done in whatever way works best for you. However, we suggest that there are a few important 'must do’s':

Step 1

Write down your goals.  Whether you use a piece of paper and pencil or open up a word document or use your smart phone to record your thoughts – it is vital to make sure you write your goals down so that you can review them at a later time.

Step 2

Frame your goals using the SMART format. Make sure that your goals are:

Specific – make each goal clear and specific

Measurable – frame each goal so that you know when you have achieved it

Actionable/Achievable – you need to be able to take practical actions to achieve a goal

Realistic - A goal must be relevant and realistic

Timely – you should assign a timeframe to each goal so you can track progress and achievement

An example of a smart goal may be to save $8000 for an overseas holiday by this time next year. The goal is specific; it can be measured - you will know when you reach the $8000 savings.  You can list the actions you need to undertake to reach the goal. Hopefully the goal is realistic and within your savings ability. If not, what other actions are you going to have to take and finally, the goal has a specific timeframe.

Step 3

Write an action list of things that you need to do in order to reach your goals.

For example, in the goal above, actions might be:

– Save $155 per week in a high interest online saver account for the next 52 weeks

– Research high interest saver accounts to determine best account for this purpose

Step 4

Regularly review your goals. The more you focus on your goals, the more your subconscious mind works on ways to achieve them.

Reviewing your goals regularly can also give you a sense of progress and, since you may have set smaller goals to reach the bigger ones, this review process is very important in keeping you motivated for the long term.

  What timeframes should you consider?

Timeframes play a very important part when you are setting financial or investing goals.

Your goals could be:

  • short, medium or long term
  • for today, for this week, for this month or for this year
  • short term goals that build toward a bigger long term goal.

Your age too is an important factor; as you get closer to retirement, you are likely to become more risk averse and this affects the way you set your goals. Different timeframes often mean using different strategies to reach your goals. If you need money for a holiday next year or a house deposit in the near future, you are likely to use investments such as a saving account.  However, you might choose growth investments such as shares to help you reach your longer term goals.

To help you put your goals into a logical framework the following is a suggestion for some appropriate time horizons. Of course, your goals are specific to you and may not fit into this framework so use them as a guide only.

Short term ( 1 - 3 years)

Short term goals are generally focused on the next 1 to 3 years. Examples of short term goals might be travel, purchasing a vehicle, paying for a wedding or saving for a deposit on a property.

Other major short term goals might be paying down credit card debt or building an emergency fund.  It is a good idea for everyone to have money put aside to cover expenses in the case of an emergency which depreives you of income.  A good rule of thumb is to have enough for at least 3 months of expenses when you are young and single and 6 months when you have greater financial responsibilities.

If you are keen, you can break your short term goals down to monthly, quarterly or yearly, depending on how motivated you are. Gaining a sense of achievement with these shorter term goals can help you stay focused on the long term.

For an example of how you might use Term Deposits as a means of reaching a short or medium term goal visit our case study on the Term deposits page. Check out MoneySmart suggestions with another short term goal case study and savings planner.

Medium term ( 4 – 6 years)

Medium term goals tend to be a little bigger than your short term goals and are generally goals that you want to achieve in around 4 to 6 years. Examples of these types of goals could be saving for a deposit for a house, starting a new business, buying an investment property or paying off a larger debt.

Long term (7+ years)

Longer term goals are generally focused on accumulating wealth for retirement or planning for actual retirement. But of course everyone is different and your long term goal might be to go back to full time study in 8 years time or start a charity when you turn 50!

Whatever your goals are, a good financial plan, whether it is one developed by you or a financial planner, will outline appropriate investment strategies around those goals and provide you with a series of actions to help you reach them.