Choosing Investing Goals: The First Step In Reaching Your Financial Targets

Choosing Investing Goals: The First Step in Reaching Your Financial Targets

How do you turn big financial objectives—building up your emergency fund, buying an investment property, taking a tropical vacation—into something you can actually achieve? The answer: setting investing goals and creating action steps to reach them.

Researchers who used volunteer projects as a proxy found that those who passively or verbally committed to joining only showed up around 17% of the time. Compare that to those who actively committed to volunteer (writing it down, signing a contract, etc.) appeared 49% of the time (1). Not only does having a goal matter, but planning it out increases your chances of achieving that goal.

The first step in reaching a financial objective is choosing your investing goals. Your money goals are unique to your life and can change over time. Defining them is the framework for all the steps you take in the future. Here’s how to choose your investing goals, common goals to choose from, and the best ways to approach goal-based investing in the short- and long-term.

What is an Investing Goal?

An investing goal is a personal finance practice that helps you reach a financial objective. Typically, these financial objectives correlate with a personal goal (for example, paying off your mortgage or building up your child’s college fund).

Because the stock market tends to grow your money more than stockpiling cash in a checking or savings account over the course of years, many people use investing goals as a way to expedite the process of reaching their long-term financial objectives.

Here’s some context on the saving vs. investing debate:

The average long-term return rate for the S&P 500 is 9.29% (2, 3). Meanwhile, as of February 2023, the average annual percentage yield (APY) for U.S. savings accounts is just 0.23% - though some high-yield savings accounts are slightly more generous (4).

How to Choose the Right Investing Goals for You

Now that you know what an investing goal is, it’s time to apply it to your life.

We’ve already given you a few examples of how goal-based investing can look, and we’ll drop some common goals in the next section. In the meantime, here’s an activity you can use to identify your unique investing goals:

1. Create a list of important personal goals that require money. This can be anything from buying a car to getting married, supporting your child’s gymnastics obsession to buying your parents a home, and beyond. Think of yourself and your loved ones who you financially support (or hope to support in the future).
2. For each goal, set a time horizon. A time horizon is a fixed point of time you give yourself to achieve the goal. For example, you may hope to get married in five years, so your time horizon to get enough money for a wedding would be five years. If you plan to retire in 35 years, your time horizon for retirement is 35 years.
3. For each goal, estimate how much money it requires. This shouldn’t be an exact calculation, but it should be slightly liberal to account for future inflation.

In general, any financial goal you hope to achieve in less than five years is a short-term goal. When investing for short-term goals, you may stick to saving with cash or a conservative investing solution with limited risk and reward. The stock market fluctuates year to year but, over time, provides consistent returns. Investing conservatively for short-term goals protects you from this intermittent fluctuation.

Any financial goal you hope to achieve in five years or longer is typically a long-term goal. The stock market is historically more forgiving in the long term, so you have more flexibility to invest this money in a strategic, diversified portfolio (5).

Putting This Information to Use with Magnifi

You already have your own list of financial goals. Here are common financial goals you can find while using the Magnifi investing app (remember, for each goal you’ll need to determine your own time horizon and an estimate of how much money it requires):

• Retirement. A long-term (and often tax-advantaged) investing plan built to support you in retirement starting at your preferred age.
• Emergency Fund. A reserve of 3-6+ months of living costs to pay for unplanned expenses and emergencies.
• Buy a House. Paying for the down payment and associated costs of buying a home and moving.
• Pay off a Mortgage. Paying off the remainder of a mortgage agreement for your home.
• Dream Vacation. A dream vacation, like an Alaskan cruise or a safari, can be the trip of a lifetime and the expense of a lifetime. It can take several months or even several years to save up for an unforgettable experience.
• Start a Business. No matter the type of business, you are likely to incur costs before you generate revenues. A reserve of savings can take the pressure off as you work to get your business started.
• College Fund. Paying for your or your children's future college expenses, or your own student loan debt.
• Buy a Second Home. Paying for the down payment and associated costs of buying a second home (for personal or investment use).
• Charitable donation. A reserve of funds set aside for the particular purpose of donating to your favorite cause.

Reflection:

Do any of your personal financial objectives overlap with these common investing goals? Do these common goals fill in any gaps in your personal finance plans that you may have forgotten about?

Pro Tip: Stay on Track with Your Goals with Regular Portfolio Analysis

Investing is not a rotisserie oven—you can’t set it and forget it. You have to monitor and adjust your investments over time, reallocating assets to keep one investment from taking over your portfolio. The best way to accomplish this is through regular and rigorous portfolio analysis.

When this happens, experts refer to it as portfolio creep. Tom Bradley, co-founder of Steadyhand Investment Funds, writes, “Creep occurs when a stock or industry does well and becomes a bigger part of an index [or portfolio]” (6).

So how do you keep an eye on your investments over time and make educated decisions that help you reach your investing goals?

A recent Magnifi study asked investors how artificial intelligence (AI) can help them make the best financial decisions. Of the respondents, 17% said they will use AI to monitor investments to stay on track for financial goals. A good example of putting this into practice is the AI investing assistant Magnifi Personal, which makes tailored investment recommendations based on your unique objectives.

Investing Goals: Where Your Financial Future Begins

The stock market can feel big and chaotic, but goal-based investing helps you find purpose and order within it. Now, you know what an investing goal is, how to find yours, and how to bring them to fruition over time.

So what’s next? Whether you use an AI assistant or another strategy to get you started, the next step involves creating a tailored portfolio that works in your favor. You’ll be in good company—a recent Magnifi study tells us that 71% of folks are investing for a better future, whatever that looks like to them.

References:

1. Increase the Odds of Achieving Your Goals by Setting Them with Your Spouse, Harvard Business Review, https://hbr.org/2015/02/increase-the-odds-of-achieving-your-goals-by-setting-them-with-your-spouse
2. S&P 500 Annual Total Return, YCharts, https://ycharts.com/indicators/sp_500_total_return_annual
3. Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends. The Standard & Poor's 500 (S&P 500) Index is a free-float weighted index that tracks the 500 most widely held stocks on the NYSE or NASDAQ and is representative of the stock market in general. It is a market value weighted index with each stock's weight in the index proportionate to its market value.
4. Goldberg, Matthew, "What is the average interest rate for savings accounts?" BankRate, https://www.bankrate.com/banking/savings/average-savings-interest-rates/
5. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
6. Bradley, Tom, "Don't let portfolio creep catch you unprepared," 26 April 2021, https://www.linkedin.com/pulse/dont-let-portfolio-creep-catch-you-unprepared-tom-bradley/?trk=portfolio_article-card_title