To achieve most goals in life, you need some type of strategy. And that’s certainly true for your financial goals. Since you likely have multiple financial goals, you may need to pursue several different strategies – but they all should follow a similar process.
What does this process entail? Here are the basic steps:
- . Like most people, you probably have a goal of someday enjoying a comfortable retirement. But have you defined what “comfortable retirement” means to you? Do you plan to spend your retirement years traveling the world, or would you rather stay close to home to be with family members? Would you like to pursue your hobbies? Open a small business? Think carefully about what this goal looks like.
- . Once you’ve identified a retirement vision, you need to put a price tag on it. How much income will you require? You don’t have to identify a figure down to the penny, but you should be able to come up with a pretty good estimate. A surprising number of people never reach this point – more than three-fourths of pre-retirees haven’t calculated how much they’ll need once they retire, according to Four Pillars of the New Retirement, a study by Age Wave and Edward Jones.
- . Your investment strategy should reflect your risk tolerance and your goals. So, for example, when you’re working toward a long-term goal, such as retirement, you’re essentially investing for growth, which means you’ll accept the level of risk that always accompanies a growth strategy. But when you’re investing for a shorter-term goal, such as taking an international vacation in a few years, you may be somewhat less concerned with maximum growth and more focused on making sure that a certain amount of money is available when you need it. Consequently, you might follow an investment strategy with a lower degree of risk.
- . Each of your goals may have its own investment strategy, but you still need to look at your goals holistically. So, for instance, if you decide you need to ramp up your investing for your child’s education, will that affect your ability to put away the amounts you’ve designated for retirement? If so, do you have the flexibility to change your retirement plans somewhat, perhaps by working an extra year or so? Of course, this might not be necessary, but it does illustrate the potential impact one choice can have on another.
- . It’s important to track the progress of your investments and investment strategies, but you’ll want to be careful about using market indexes as benchmarks. Your portfolio was designed for your risk tolerance and goals, so comparing it to an equity index (like the S&P 500) isn’t all that relevant, or helpful. Instead, measure your progress at least annually to determine if you’re on track to achieve the goals your strategy was designed to meet. When you review your progress, you may also want to determine if any changes in your family situation or your employment might affect your investment strategies. A financial professional can help you in this area.
Achieving your financial goals takes time, effort and commitment. But by following the most appropriate strategies for your situation, you’ve got a path that can help lead you to success.