When it comes to investing, numbers are just one piece of the puzzle.
When asked why you invest, your answer isn’t likely building wealth for wealth’s sake. Instead, it probably has something to do with helping you achieve your unique goals—saving for your kid’s college, building your dream home, shoring up your nest egg, creating a safety net, among other things.
A goals-based investment philosophy is transformative. It turns numbers on a screen into a tool that propels you forward toward your goals.
How can you shift your mindset and make your investing habits centered on your goals?
Take Control of Your Time In the Market, Rather Than Timing The Market
Trends and fads pepper financial markets (hello, GameStop, AMC, and other meme stocks), but timing the market takes a narrow, short-term view of your dollars. Reframe this idea by exploring the markets and your investments as a long-term strategy.
How can you get started?
First, examine how you invest. Are you investing a portion of your paycheck to your 401(k)? Do you automate investments to your brokerage account or IRA? If so, you engage in a process called dollar-cost averaging.
Dollar-cost averaging is an investment strategy that calls for investing a set amount of money throughout a period of time regardless of market conditions. Think about it like this: if you invested $50 a week for 45 years with an 8% return (the average is about 10%), you’d be a millionaire. Just like that.
The secret sauce to reaching your investment goals isn’t all that fancy. It’s actually pretty simple:
- Start early.
- Increase your contributions as your income grows.
- Invest consistently.
The earlier you invest, the more time your money has to compound and weather market swings. While no one can accurately predict market activity 100% of the time, data has illustrated that markets perform better over long periods—think 10, 20, 30, even 50 years.
Investing shouldn’t stay stagnant throughout your career. As you start to pay off debt, redirect that money toward other goals.
You should also look to bump your contributions as you earn more money. That might mean increasing your 401(k) paycheck deferrals with each raise or allocating a portion of your bonus to your retirement.
Does your company offer a 401(k) match? If so, step 1 should be to contribute enough to qualify for the entire match—it’s free money, after all. The average 401(k) match is 4.3%, and while that may not seem like a lot, the numbers add up over time quickly.
Alongside your 401(k), aim to max out a Roth IRA. You can contribute up to $6,000 in 2021. Roth IRAs are special because earnings and qualified distributions are tax-free—two significant long-term perks!
Before you get too excited, check to ensure you qualify for direct contributions. Roth IRAs carry income thresholds for contributing. In 2021, if you make more than $140,000 filing single or $208,000 married filing jointly, you can’t directly contribute.
There are some workarounds like Roth conversions, but those come with many tax and cash flow implications that you should plan with your advisor and tax professional before initiating.
Remember, investing isn’t a race of speed, rather one of endurance.
Organize and Prioritize Your Goals
Your goals are the foundation of your investment plan. Goals bring purpose and meaning to each dollar and help keep you motivated to stay on track long-term.
What type of goals can investing help you achieve? Think retirement, saving for your kid’s college, aiding parents or relatives, financial freedom, and more.
Start by making a list of your financial goals—big and small. You should have a rough idea of what your goals will “cost” simply to offer a baseline to get started. Then, examine the appropriate investment vehicles and a set reasonable savings goals.
It’s also essential to prioritize your goals based on your needs and values, both short and long-term.
- What goals are most important to you?
- How can you allocate your resources appropriately for achieving those goals?
- How can you prioritize your goals effectively?
If you already have money set aside for short-term goals (less than three years away) and long-term goals like retirement and college savings, you’re likely ready to start investing in a brokerage account for other goals that fall somewhere in between.
While investing is a tool to help you reach some goals, it’s certainly not suitable for every financial pursuit. The best example is your emergency savings.
Your emergency fund should be available when you need it most. Store the money in a liquid and safe place like a high-yield savings account. When it comes to emergency money, you may not know exactly what you’re saving for, but you’ll be happy that the money is there and accessible when you need it.
Start With The End in Mind—Reverse Engineer Your Investing Strategy
Each goal has a unique cost, timeline, and value. All of these elements, along with your risk tolerance, can help you invest with purpose.
Let’s put some numbers in the mix.
You have a newborn (congratulations!) and want to start saving for their future college education. Your savings goal is $100,000, and you anticipate an average 7% return. Given that college inflation is at 5%, you’d need to invest about $500 per month for 18 years. Now, that $500 has a specific purpose and actively works each month to help you achieve your goals.
Do you want to calculate some of your financial goals? Check out a future value calculator that allows you to visualize your investment’s long-term. Leveraging financial tools like this can take sterile numbers to a path that helps you reach your goals.
Goals-based investing encourages good financial habits. Remember the three fundamentals for long-term investing: start early, increase with time, and stay consistent. The more intentional you can be about your investments, the better off you’ll be in the long run.
Start by building those habits early on and intentionally invest for your future self.