How to Set Investment Goals

When it comes to investing, most people start with the question of ‘What’: e.g., What should I invest in? But an important place to start is with the ‘Why’: Why do you want to invest in the first place? Why are you building an investment portfolio?

That’s because setting up your investment strategy will be guided by your financial goals. Your goals help determine other key aspects of your strategy, including your time horizon (how long will it take to reach a certain goal), your risk tolerance, and which securities might meet your aims.

Goal-setting is sometimes an overlooked first step in building a sound investment strategy, but it provides an important structure to guide you forward.

What Is the Primary Goal of Investing?

Even without a clear purpose, there are many reasons to invest, such as aiming to accumulate wealth or outpace inflation. The portfolio that’s appropriate for you will depend on your objectives and time horizon, which means you can’t plan your portfolio unless you know what you want to invest towards, how much you want to invest, and when you’d like to use that money.

Think of building an investment strategy as a top-down approach. Start with the big picture idea of what you want to accomplish. Then, hone in on the strategy that makes the most sense given those goals.

Should you buy stocks or bonds? Should your money be held in cash? Or, should you do something else entirely?

Recommended: Stock Market Basics for Beginners

How to Define Your Investing Goals

First, you may want to consider these three common goals: Creating an emergency fund, paying off debt, and saving for retirement.

Setting up an emergency fund and saving for retirement are sometimes referred to as “bookend goals,” because they are primary short-term and long-term financial goals.

In the middle, so to say, is the goal of paying down any debts you might have. Technically, this may not seem like a traditional “investment,” but it is in the sense that once you’re debt free you can put that money toward other goals.

1. Build an Emergency Fund

Your emergency fund is a lump sum that you can easily access should an emergency arise — for example, if you get laid off or face unexpected health costs.

In most cases, an emergency fund isn’t invested in the stock market — it’s money that’s typically put in a savings account or similar deposit account. As part of a financial plan, an emergency fund is a shorter-term goal that’s generally intended to be lower risk. Unlike insured deposit accounts, investments may lose value, including the principal originally invested, and they’re not insured against bank failure by the Federal Deposit Insurance Corporation (FDIC).

That’s why setting up an emergency fund that is fairly liquid (i.e., accessible), and not invested in high-risk securities is an important consideration when determining your investing budget.

The common recommendation is that this fund should be three to six times your monthly household expenditures, depending on how risk-averse and well-insured you are.

Consider Asking Yourself:

•   How much do I spend each month?

•   How much of that is necessary spending, and how much is discretionary?

•   How many months’ expenses would I like to have saved?

•   Do I have dependents or others that depend on my income?

•   What’s my target emergency fund?

2. Pay Off High-Interest Debt

High-interest debt is a consideration when investing, because it’s possible that interest you’re charged could be more than the potential return you may earn from investments in the stock market. This is one tactic that’s common to most debt payoff strategies.

Over the long term, eliminating high-interest debt such as credit card debt is a low-risk way to improve your financial situation. If you have outstanding balances on several cards, one debt payoff strategy (called the debt avalanche method) is to start by paying down the card that charges the highest interest rate. Once that’s paid off, look at the other money you owe, such as layaway plans and auto loans, and pay them off in the order of the highest-interest loan first.

The money you owe on your home — the mortgage — may deserve separate consideration, as interest payments come with special tax treatment.

3. Fund Your Retirement Accounts

Retirement may be your largest long-term financial goal, and even if it feels far away, it’s helpful to start saving early. Why? The earlier you start saving for retirement, the more time your money has to work for you.

Consider Asking Yourself:

•   At what age do you want to retire? You can start getting your Social Security retirement benefits as early as age 62. But you can claim “full retirement benefits” only when you reach your full retirement age, which for those born in 1960 or later is age 67. If you wait until age 70 to file for Social Security, your benefit amount will increase.

•   How much money do you need to live on each year (in today’s dollars)?

•   How long do you expect to live? Statistically, those born in the 1980s have a life expectancy of 77-82 years, but to be safe, you may want to plan to cover the expenses of a longer life.

•   What do you currently have saved for this goal? You may want to use a retirement calculator to see if you’re on track.

There are also tax-advantaged plans to help you invest for these important goals, such as 401(k)s, 403(b)s, IRAs and Roth IRAs. They each have their own advantages, for instance consider the benefits of Roth vs. traditional IRAs.

Common Short- and Long-Term Investment Goals

How you prioritize your financial goals — from your emergency fund to your retirement investments is more personal. For example, do you want to invest toward buying a home? Start a family? Funding a college education? Launch a business? Many of the above?

Any goal you can think of is on the table. You may want to be specific — exactly how much money you need to achieve each goal, and by when. The more specific you are, the better the chances are that you might reach that target. And when the time comes to use that money, you’ll have already given yourself permission and can enjoy it.

Consider Asking Yourself:

•   What is your goal?

•   When do you need the money?

•   How much do you need?

•   How much can you invest each month?

•   What obstacles may come up?

Matching Investment Goals to Time Horizons

As you’ve seen in the exercises above, each of your goals has a specific time horizon. This is an important aspect of your investment strategy: Generally speaking, the longer the time horizon, the more comfortable an investor may be taking on greater risk. Longer investment periods give you more time to potentially recover from the higher volatility that may accompany assets with higher growth potential. This is one area where an investment calculator can help.

When making a decision about how to build a portfolio, you may want to keep in mind that risk and reward are two sides of the same coin. You cannot have one without the other.

There is no such thing as an investment that is high reward with no risk. Often, risk comes in the form of volatility, which is how much the price of an investment type fluctuates. Although these fluctuations are often temporary, it can take months or even years for an asset’s performance to reach its historical average.

How much risk you’re willing to take will also depend on whether you’re making short-term vs. long-term investments.

Short-Term Goals (Less Than 3 Years)

For goals like: Setting up an emergency fund, travel, buying a new car.

A good rule of thumb is to keep any money you need within the next three years “liquid,” or available as soon as you need it. For example, the whole point of having emergency cash is to have access to that money in the event of a crisis, without worry or friction.

Additionally, it’s unlikely that you’ll want to subject money designated for the short term to the volatility of investments like the stock market. The biggest risk you take with short-term money is losing any of it at all, so you’ll probably want to keep it in cash or cash equivalents.

Depending on your risk tolerance, you might consider investing some money for short-term goals in a conservative portfolio that has the potential to pay a higher yield than a savings account, but may offer a lower risk of losing money. If you go this route, you may want to remain flexible about when and how you tap into those investments.

You may elect to keep this cash in an interest-bearing savings account where you may earn interest on your cash savings. You may even find it helpful to open multiple savings accounts, giving them distinct names, in order to keep track of your various goals.

Medium-Term Goals (3 to 10 Years)

These are goals such as: a home purchase, starting a family, planning a trip, returning to school. With a time horizon of three to 10 years, you may be willing to take on additional risk with your money, to give it a greater chance to grow. For these types of goals, you could potentially choose a moderate or moderately conservative portfolio, with a combination of cash, fixed-income investments like bonds, and some stocks.

More than likely, you’ll hold these assets in an investment account, which is sometimes also called a brokerage account.

For goals where you’re investing money for the mid-term, it generally does not make sense to use a retirement account like a 401(k) or a traditional IRA, where you could be penalized for pulling the money out before retirement.

Recommended: What Is Dollar-Cost Averaging?

Long-Term Goals (10+ Years)

The shorter-term goals in this category include a child’s college savings, or a second home. With a time horizon of 10-20 years, some investors may consider investing in a higher allocation of stocks and bonds. Investments for goals with a pre-retirement timeline should be held in an investment or brokerage account.

For a child’s college tuition, some might consider using a 529 Plan which provides some tax benefits to those that are saving for the purpose of higher education.

For longer-term goals, like financial independence, you may have decades to weather the ups and downs of the market and economic cycles. In this scenario, some investors may focus on aggressive growth early on, and then shift to a more conservative investment allocation over time. This may mean starting with a majority of a portfolio in the stock market or other high-risk, high-reward investments.

To save for retirement, you may want to consider investing in an online IRA, a 401(k) plan, or some other retirement-specific account. Retirement accounts have benefits when it comes to taxes, such as deferment on paying taxes until you withdraw from your 401k, or the ability to withdraw contributions from your Roth IRA early without penalties.

4 Tips for Achieving Your Investment Goals

Creating a plan to help you work toward your financial goals can seem daunting. But like any big challenge, you can take it on by using four simple steps: use the S.M.A.R.T. goal framework; understand your risk tolerance; diversify your portfolio, and then review and adjust regularly.

By taking these steps, one at a time, you can begin active and immediate progress towards your goals, whatever they may be.

Use the SMART Goal Framework

The first step in reaching your goals is to know what they are, as precisely as possible. To better understand your financial goals, one technique that may be helpful is the S.M.A.R.T. framework:

•   Specific: Be clear  about what you want to achieve, such as exactly what you want to invest for.

•   Measurable: Assign real numbers to your goals. Measurable goals allow you to track your progress and monitor your success.

•   Achievable: Setting unrealistic expectations can lead to frustration and disappointment. Ensure your goals are realistic for your income and expenses.

•   Relevant: Make sure your goals align with your overall financial plan and your life priorities.

•   Time-based: You can achieve your goal within a reasonable timeframe.

Understand Your Risk Tolerance

Regardless of what you’re investing for, it’s important to understand your personal level of risk tolerance. This is the level of risk you’re willing to take on to achieve your financial goals, and your risk tolerance will change based on your time horizon, and emotional risk capacity, and whether you’re focused on preserving capital, as opposed to maximizing potential returns.

Diversifying your investments by goal into different risk buckets can help you align your risk tolerance with your personal goals and timelines. One way to quickly diversify your investments is to invest in ETFs.

There’s no one product, however, that can manage risk for you. The first step is to understand how much risk you’re willing to take on. This risk tolerance quiz can also help you understand your own personal risk tolerance.

Diversify Your Portfolio

It’s also important to diversify the investments in your portfolio. Portfolio diversification is a process that involves spreading investments across different asset classes, industries, sectors, and locations around the globe. It is important for investors because it can potentially help manage risk, though it can’t entirely eliminate risk.

The exact mix of domestic stocks, international stocks, bonds and other fixed-income assets, and cash or cash equivalents will depend on your risk tolerance, and the goals you’re investing for. You will also have to decide how involved you want to be in managing your portfolio, as this will help you decide between active vs. passive investing.

Review and Adjust Regularly

Once you’ve diversified your portfolio to suit your needs, the next step is typically to adjust the asset mix periodically, a process called portfolio rebalancing — realigning a portfolio’s holdings to match your desired asset allocation.

Over time the different asset classes in your portfolio will likely have different returns, changing how much you hold of each. One stock or fund might have such high returns it eventually grows to be a more significant portion of the portfolio than you planned for. Rebalancing helps you keep your portfolio where you set it. You may also want to rebalance your portfolio if your goals change.

What’s Next?

Once you’ve outlined your goals, you’ve completed the first step toward investing your money.

Next, you can learn more about the investment options that are available to you. This will aid you in building a portfolio or setting up an automated investing program that will help you achieve your goals.

One place to start is exploring the different asset classes and their respective risk and reward profiles. If you are going to be invested in something, it’s helpful to know what to expect. Proper expectations may make you a more successful long-term investor.

Investing isn’t just for the wealthy; it’s for anyone who wants to achieve their financial goals. There are low-cost, simple, and effective investing options that are accessible to investors of all sizes.

Before you invest, you may want to spend some time thinking about what you’re investing for. Naming your goals will help guide you towards an appropriate investment portfolio. As a bonus, thinking deeply about goals may just help you to find the motivation to stick with them.

The Takeaway

Before investing, it’s important to define your financial goals and build a strategy to meet them. In this way, your goals can help you define an investing strategy that helps you target your long-term goals In the short term, that might begin with an emergency fund, with intermediate goals like buying a home or going on a vacation or paying for college, and longer term goals like retirement.

For shorter term goals, more conservative investments, like bonds, may make sense, while longer term goals may lend themselves more aggressive, growth-oriented assets, like stocks. Once your strategy and portfolio is set, you may want to use an automatic investment plan, or you may want to be more hands on and periodically review and rebalance your portfolio to ensure it remains aligned with your goals as they evolve.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest®. You can trade stocks, ETFs, or options through self-directed investing with SoFi Securities, or simply automate your investments with a robo advisor from SoFi Wealth. You'll gain access to alternative investments and upcoming IPOs, and can plan for retirement with a tax-advantaged IRA. With SoFi, you can manage all your investments, all in one place.

Take a step toward reaching your financial goals with SoFi Invest.

FAQ

How do I prioritize my investment goals?

Prioritizing your investment goals is a multi-step process. First, determine your financial priorities — you might start with housing, living expenses, emergency savings, and paying off high-interest debt. After that, set your investment goals, such as increasing your personal wealth, retirement planning, buying a home, paying for a child’s education, taking a trip, or starting a business.

What is a good first investment goal?

One investing goal is to start an emergency fund. This is money you can easily access if a crisis arises — for example, such as a layoff or an unexpected health emergency. The common recommendation is to keep three to six times your monthly household expenditures in this fund, depending on how risk-averse and well-insured you are.

How often should I review my investing goals?

Whenever your life situation changes, it makes sense to review your goals to make sure they still suit your circumstances. But even without those changes, the consensus among financial planners is that you should check at least once per year and probably once per quarter.

Can my investment goals change over time?

Your goals will necessarily change over time — a new job, a new child, a new passion will necessarily change the things you’re investing for. A successful investing approach likely involves some careful discernment about what matters and then choosing a strategy to help meet your goals.

What’s the difference between saving and investing?

Savings may grow with time, but typically this is not money you want to risk. Also, you want to access your savings easily if you have to. Investments may deliver higher returns, but come with the risk that you can lose some or all of your money. Over time, the rewards of investing often compensates investors for that risk, however.

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Investment Risk: Diversification can help reduce some investment risk, but cannot guarantee profit nor fully protect in a down market.
Dollar Cost Averaging (DCA): Dollar Cost Averaging (DCA) is an investment strategy where you regularly invest a fixed amount of money regardless of market conditions. This approach aims to reduce the impact of market volatility and lower your average cost per share over time. DCA does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals and risk tolerance before using this strategy, understanding that past performance is not indicative of future results. Consult with a financial advisor to determine if DCA is appropriate for your individual circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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