Investment Goals: How to Define and Plan Them
Investment goals are financial objectives that a person hopes to support with money that is saved or invested. A clear goal can provide context for decisions about how much money may be needed, when it may be needed and what level of uncertainty may be acceptable.
What Is an Investment Goal?
An investment goal is a specific financial objective connected to future needs or plans. Goals can vary significantly depending on personal circumstances, priorities and financial resources.
An investment goal helps answer three basic questions: What is the money for? How much may be needed? When may it be needed?
Examples of Investment Goals
- Building funds for a major future expense
- Planning for retirement
- Saving for education or training
- Building long-term financial security
- Preparing for a future purchase
- Supporting another personal or family financial objective
Why Clear Goals Can Matter
Without a clear purpose, it can be difficult to evaluate whether an investment plan is progressing as intended. Defining a goal may help estimate the amount required, identify an expected time horizon and review progress over time.
Goals may also help separate money intended for different purposes. Money that may be needed soon can have different planning considerations from money intended for a long-term objective.
Consider the Time Horizon
The time horizon is the period between the present and the point when money may be needed. A goal expected in the near future may involve different considerations from a goal that is many years away.
Two people may each have a goal of accumulating the same amount of money. If one expects to need it in two years and another in twenty years, their planning timelines are different even though the target amount is the same.
Estimate the Amount Needed
A financial goal may involve estimating how much money could be required in the future. This estimate can change because prices, personal circumstances and other assumptions may change over time.
For long-term goals, inflation may be one factor to consider because the purchasing power of money can change.
Consider Risk and Uncertainty
Investments can rise or fall in value, and future returns cannot be known with certainty. Understanding the possibility of losses is an important part of investment planning.
A person's ability and willingness to tolerate investment losses can differ based on income, savings, financial obligations, time horizon and other circumstances.
Liquidity Needs
Some financial goals may require money to be available at a specific time. Liquidity broadly refers to how easily an asset may be converted into cash without significant delay.
Review Goals Regularly
Income, expenses, responsibilities, priorities and timelines can change. Reviewing goals periodically can help determine whether the original plan still matches current circumstances.
Questions to Consider
- What is the specific purpose of the money?
- How much money may be needed?
- When is the money expected to be required?
- Could inflation affect the future amount needed?
- How much investment uncertainty could you tolerate?
- How important is access to the money before the planned date?
- Could your financial circumstances or priorities change?
Key Takeaways
- Investment goals are financial objectives that saving or investing may support.
- Clear goals can provide a framework for financial planning.
- The amount needed and time horizon can be important considerations.
- Investment risk and possible losses should be understood.
- Liquidity needs can affect financial planning decisions.
- Goals and plans may need to be reviewed when circumstances change.