We all have dreams, whether it’s starting our own business, buying our dream car, or owning a house. But dreams come with a price tag, and sometimes that price seems out of reach. The brand-new car you’ve been eyeing? Beyond your current budget. That dream house for your family? Requires a hefty sum you can’t afford with your current job. And launching your own business? Well, that demands capital, skills, and effort you can’t spare right now. But here’s the thing: dreams don’t fade away. They persist, urging us to find a way. The solution? Choosing investments by your goals not just your income.
The good news is that achieving your dreams doesn’t always require money upfront. It starts with a simple act: putting pen to paper. Can you write down what you want to achieve in the next two, five, or ten years? Can you place that piece of paper somewhere you’ll see it every day? Yes, you absolutely can. And guess what? Those goals you jot down and revisit daily have a remarkable way of becoming reality over time. Investment goals are no exception choosing investments by your goals turns plans into progress.
But wait,” you might ask, “how can I buy that brand-new car or own a house just by setting objectives?” Fair question. The truth is, you do need money, but not necessarily all at once. Let’s debunk the misconception. I’ve witnessed people earning average salaries through their day jobs who still managed to buy their own homes or invest in real estate. One of my colleagues at the university worked in admin with a modest salary, yet managed to buy a house in a decent neighborhood.
Curious about how he did it, I asked him how he achieved this on such a low salary. His reply was simple: “I don’t plan for the short term. People I have worked with, who have accumulated wealth, have at least answered these four questions:
- What Is Your Objective? Clearly define your financial goals whether it’s buying a house, planning for retirement, or achieving any other milestone.
- How Much Money Is Required? Consider both earning and saving. Calculate how much you need to set aside regularly.
- When Do You Want to Achieve It? Set a realistic timeline. Short-term, medium-term, or long-term—choose wisely.
- How Will You Invest? Select the right investment vehicles based on your objective and time frame.
Step 1: Setting Clear Investment Objectives (Choosing Investments by Your Goals)
Setting your investment objective is the first crucial step. It’s essential to know from the outset what the purpose of your investment is. By defining clear objectives, you give yourself a target to aim for, and achieving it becomes a matter of strategy. Unfortunately, I’ve seen many people who never set clear financial goals, and as a result, they never achieve them.
Remember, it doesn’t matter how much money you’re making or saving if you’re not choosing investments by your goals, you might earn a lot but still end up financially broke. I’ve observed peers who started their careers well but didn’t fare well financially in the long term. So, set your objectives clearly whether it’s buying a house, planning for retirement, or achieving any other financial milestone.
Step 2: How Much Money Is Required
Choosing investments by your goals requires honest math inflation won’t wait. This is the question only you can answer. There is a huge difference between personal preferences when buying asset and as a result money requirement also changes.
Picture this: you’re standing at a crossroads, deciding between a sleek Toyota and a zippy Suzuki. Your choice isn’t just about wheels; it’s about your preferences, lifestyle, and, yes, your wallet. But here’s the twist: personal preferences impact more than just car purchases. They ripple through your financial landscape, affecting the resources you need.
Take housing, for instance. Imagine owning a cozy 250-square-foot house in your dream neighborhood. Sounds perfect, right? But wait—the price tag might surprise you. It could be double what you’d pay for a similar space elsewhere. Preferences, meet reality check!
There is one thing however you need to factor in when estimating your money requirement, the sneaky guest at the financial party: inflation. It’s like that mischievous cousin who messes with your plans. Here’s the deal: as inflation rises, your money’s purchasing power shrinks. So, if you’re aiming to accumulate $27,000 in two years, consider this: the current annual inflation rate is 8%. Crunch the numbers, and your buying power drops to around $23,150. Yikes!
The solution? Be inflation-savvy. Save a little extra to stay ahead of the curve
Step 3: Timing Is Everything
Once you’ve established your investment objectives, the next step is to define a realistic time frame. This serves two important purposes: First, it provides a clear deadline for achieving your goal, and second, it helps you choose the right investment vehicle. Consider setting your timeline as follows:
- Short Term: Less than two years.
- Medium Term: Less than five years.
- Long Term: Beyond 15 years.
In today’s digital age, social media often promotes get-rich-quick schemes, leading people to redefine timeframes. For instance, some now consider six months as short term and five years as long term. However, when setting your financial goals, avoid following these misleading definitions. True long-term financial planning spans a decade or more, and investment vehicles yield results when you set rational timelines.
Step 4: Choosing Financial Vehicle
The final step is to choose the right financial vehicle financial accounts or products used to generate returns. Remember, not all financial vehicles are the same. Stocks, bonds, and mutual funds each have characteristics that make them suitable for particular financial objectives. For instance, stocks are generally not ideal for short-term investing because their prices can fluctuate wildly in the short term. Conversely, bonds are better suited for a steady passive income plan.
Choosing your investment vehicle wisely increases the likelihood of achieving your goals. On the other hand, choosing the wrong one can not only derail your objectives but also risk your principal amount. So, be cautious when selecting your investment vehicle.
Below is a summary of the investment strategy. The x-axis represents the investment time frame, while the y-axis indicates the resource requirements. Each financial goal is positioned according to its time frame and resource needs. Additionally, the graph shows the appropriate investment vehicle for achieving each goal.
Understanding Investment Exclusions: Why Some Asset Classes Are Omitted
You might have wondered why certain asset classes are missing from the figure. I deliberately omitted some investment categories, including futures, forwards, day trading, and Bitcoin. Why? Research consistently shows that even with the most complex investment products available in the market, prudent investors view investment as a long-term endeavor rather than engaging in day trading or speculating on futures.
These investment types are subject to significant fluctuations with no certainty. For instance, futures prices depend on short-term, highly volatile movements of underlying assets, which can resemble gambling more than strategic investing. Similarly, Bitcoin has no intrinsic value, making it a highly speculative asset. If you’ve clearly defined your goals within a specific timeline, it’s advisable to exclude such high-risk investments from your overall strategy.
Diversification: Mitigating Risk and Achieving Financial Goals
Diversification is the safety net for choosing investments by your goals. It’s essential to achieve your financial goals using relevant investment vehicles, but always keep the risks in mind. Perhaps you’ve invested in blue-chip stocks for retirement, only to find that they didn’t perform as expected over the long run. Or maybe the price of real estate declined due to an overall economic downturn.
The solution to such unexpected situations lies in diversification—the practice of holding a variety of investments rather than concentrating all your resources in a single asset. Diversification helps reduce the risk of loss and evens out returns across different investments. By diversifying, you protect yourself from the surprises of not achieving your goals. Instead of putting all your money into stocks for a long-term retirement plan, consider allocating some funds to tax-advantaged retirement accounts like a 401(k) or 403(b), along with investments in mutual funds. This balanced approach will help you navigate market uncertainties while staying on track to meet your financial objectives.
Summary
- Achieving your dream doesn’t start with how much you earn or save; it starts with a clear, written objective.
- Calculate how much money you need to achieve your dream, factoring in inflation.
- Attaching a timeline to your objective will increase the likelihood of achieving it.
- Choosing investments wisely ensures that you will get what you want.