Life with Money | Setting Great Investor Goals

Investor goals revolve around lifestyle choices and major life events. Learning how to set SMART money goals will help you make the most of your dollars.

Investor Goals & Motivations

Money shows up in our everyday lives. How we think about the green stuff informs how we view the world and how it operates fundamentally. As we grow up, our views of money and its relationship to our desired lifestyles grow and change. If you’re like most adults, money can be a source of stress or elation. Our relationship to money is shaped by what we intend to do with it — what our goals are. A realistic and balanced understanding of how money and investing enable goals can go a long way.

Let’s talk about investment goals and how to approach a relationship with money healthily.

But first, let’s talk about how investing can grow money for your financial objectives.

How Investing Helps…

Putting a substantial portion of your savings into the markets will create real returns and grow your wealth — which you can spend on your goals.

Owning stocks, mutual funds, bonds, real estate or a combination thereof consistently is the key to success. Invested monies grow exponentially as they reap the benefits of compound interest.

For perspective, if a person invested $10,000 in an S&P 500 index fund (basket of securities of the top 500 publicly traded U.S. firms) in 2000 and held for 20 years, that $10,000 would become $49,270. With an 8% average annualized real rate of return — you nearly 5x your money!

With delayed gratification and smart investing, you can generate capital to enable your dream life. Investment in productive assets puts your money to work for you, building value over time while you live your everyday life.

Remember, investments are like fine wine — they get better with age.

Before we dive into investment goals, let’s talk about a healthy approach to setting good goals.

S.M.A.R.T.E.R. Goals

People’s goals say a lot about them and their aspirations in life. Setting realistic goals and expectations helps you build a healthy relationship with yourself, your idea of money, and your future self. With a sound approach to planning, you can bypass the need for financial advisors — saving yourself time and money.

The SMARTER goals framework is used in many contexts and is also handy for setting good investment goals.

• Specific — a financial goal should be clear and understandable
• Measurable — you can gauge your progress against a target return range
• Achievable — take action to achieve your goal and mechanisms to automate it if possible
• Relevant– determine if it is realistic and will be helpful to you in the future
• Timely — set a time horizon to track the progress of your investments
• Evaluate — periodically checking how your investing goal is going and redirect if needed
• Risk Tolerance — Unlike other goals, investment goals must factor in your risk tolerance. Taking on higher risk increases the likelihood of potential loss and potential gain.

Risk Tolerance — Deep Dive!

Some goals call for more or less risk — largely depending on your time horizon. Your personal risk tolerance is up to you and what you are comfortable with.

The below chart details general risk and return levels for standard asset classes. It is handy to use when thinking about your risk tolerance and assets that match it.

Sidebar — the use of the S&P 500 example above reflects a balanced risk and return rewards profile, according to Oswal’s chart.

Though not listed on this chart, cryptocurrencies like Bitcoin or Ethereum would have the highest risk-return tradeoff. They are very volatile and can have massive price fluctuations daily.

Having a framework to build goals will help remind you of the point of your investments and establish reasonable, informed performance expectations. Coupled with an understanding of each asset’s risk-return tradeoff, these are superb tools to have. With them, you can build your financial life without the need for overpriced advice and services from financial advisors.

Investment Goals — Bringing it All Together

Let’s say your goal is to build a 7-figure net worth for retirement over the next 40 years. You look at your savings and budget and realize you can comfortably deposit $5,000 initially and add $500/month for the next 40 years. As the goal is retirement, you want to invest in an asset that is more stable and predictable over the long term.

If you’re interested in long term investing, we have an article with additional details.

Seeking to meet the market in returns and risk, you research the various diversified, market-based ETFs. As you learn about the S&P 500, you find it is made up of the 500 leading publicly traded U.S. companies and is considered a stable and balanced investment.

After looking into ETFs, you decide to invest in SPY, SPDR’s S&P 500 Trust ETF. You expect to earn an 8% average annual real return of the index over the long term. You look into online compound investment calculators to confirm your analysis.

Using Money Geek’s calculator, you find that you will achieve your financial goal, becoming a millionaire through 33 years of investing — if all goes as expected!

In total:

• You’ve set a SMARTER goal of achieving a 7-figure net worth in 40 years.
• You’ve conducted research and devised a way to reach your objective.
• Using your research and realistic goals, you’ve set healthy expectations about the timeframe and net worth to become a millionaire.

The only steps left are to stick with your plan and periodically evaluate your progress, perhaps every 6 months to a year, to ensure everything is on track.

Your objectives will differ from those of other investors, and that’s okay.

We’ve included information on three general investment goals — retirement, home buying, and college savings — to help frame and inform your approach to goal-setting.

Common Investment Goals

Retirement Planning

This is one of the most common investment goals. It is often the reason people start investing. The amount you need to save varies based on your desired location, expected medical expenses, lifestyle choices, and anticipated tax rates. No matter how you go about it, it’s nice to invest in accounts that are purpose-built for retirement. They are designed to be valuable tools and incentivize account holders to engage in the financial planning process and value their future selves.

You can expect the performance to match the above chart as you invest on a 30 to 40-year time horizon, as the point is long-term holding.

The most popular investment vehicles are listed below:

• 401(k) — a tax-advantaged retirement account where you can contribute up to $19,500 in pretax contributions per year. Contributing today decreases your taxable income, but your withdrawals will be taxed in the future. An employer usually offers this account with a matching option if you contribute a certain amount of your total salary. The standard advice is to contribute enough to maximize the employer match. You can begin taking withdrawals at 59 ½. Note that most 401(k) plans state the participant must be 21 years of age or older to be eligible. Investors usually hold conservative assets such as market-based mutual funds, ETFs, and a mix of bonds. A 401(k) is usually the most conservative vehicle in your portfolio.
• Roth IRA — a tax-advantaged retirement account where an individual can contribute up to $6,000 per year on a post-tax basis. Contributions do not affect your taxable income, and your withdrawals are tax-free starting at 59 ½ — who doesn’t like free money? A Roth IRA can be set up individually and is a great vehicle to invest through for people who could use more tax-free money in retirement and currently make less than $139,000. You can open a Roth IRA at any age, though if the account holder is less than 18 years of age, then it will be a custodial account.
• The Roth IRA is our favorite investment account as it works well for young and middle-class professionals. It offers investors more control and flexibility over how they manage their retirement fund compared to a 401(k). Withdrawals on contributions can be made at any time, but there may be a penalty on profits made if withdrawn before 59 1/2. If you are a first-time homebuyer, you can withdraw up to $10,000 of your investments without penalty. It is possible to use high-risk investing strategies in this account to beat average market returns. However, you would do so at your own risk. An investor can be more aggressive in a Roth IRA than in a 401(k) if one employs the right strategy to achieve higher than average returns. Another approach is to invest for income by holding dividend stocks or ETFs that produce regular payouts. However, income strategies are considered to be more beneficial to older investors.

For both accounts, consider changing the asset allocation as you approach your retirement date. These accounts do not come with performance guarantees.

• Personal brokerage — a brokerage account where you can invest at any time and pay taxes on capital gains upon selling your investments. Buying and selling investments often can rack up a tax bill at your highest marginal tax rate, while losing up to $3,000/year in the markets reduces your taxable income. Holding an asset for longer than 1 year and then selling triggers a separate taxation scale for long-term capital gains. You can set up a brokerage account on various online platforms, including Robinhood, TD Ameritrade, and Charles Schwab. This account does not have a distinct advantage for retirement, unlike these two above, but is still a useful tool to build wealth. You can open a brokerage account at any age, but you will have a custodial account if you are younger than 18. An investor can swing for the fences and search for short-term opportunities to get ahead in the market.

Home Buying

Home buying is a staple of American culture and a hallmark of adulthood. Investing your money for even a few years can be helpful to pay for a home. A larger down payment reduces the size of your mortgage and lowers interest payments–helping you pay it off faster and cheaper. This allows you to invest some of your funds into the markets, earning a higher return than you would find from paying off your mortgage early. On the other hand, there are psychological benefits of investing to pay off your mortgage early and becoming debt-free.

The Millennial and Gen Z cohorts are delaying homeownership for lifestyle and career reasons as they postpone settling down, which is usually a prerequisite to homeownership.

If this is your situation, you can play it to your advantage by factoring it into your financial plan. You can plan what a possible downpayment would look like and start investing in it. For example, if you invest in the S&P 500 for 7 years with a $10,000 principal and $200 in monthly contributions, then you make almost 4x your money in that time span.

You could target less risky assets, so you have a larger reserve of wealth to tap when you decide to buy a home.

At Finance Futurists, several of us plan to buy homes in the next 5 to 7 years. We’ve made investment goals to save for our down payments. I’ve made it a financial objective to buy a home in about 6 or 8 years. Accordingly, one of my investment goals is saving and investing enough for a downpayment of about 15–20%. If I use a 20% downpayment, I bypass Private Mortgage Insurance (PMI), an extra insurance charge on a mortgage. It is usually 0.25 to 2% but can go higher to numbers like 5% depending on the mortgage amount and interest rate! Buying a home in CA is already expensive enough, and my financial planning calls for me to reduce those costs where I can. With a long time horizon, I have plenty of time to build capital in the markets for this big buy.

**There is a tradeoff between buying early vs. building funds as real estate prices rise. The calculus behind the tradeoff depends on your personal situation and your target real estate market.**

Child Higher Education Savings Plan

Let’s talk saving for college. According to finaid.org, tuition price goes up at 2x the usual inflation rate at an average of 8%. So tuition doubles in price every 9 years! For context, the pace of tuition increases keeps pace with those of securities on the stock market.

First off, college is not for everyone and that’s alright. Online classes have made knowledge accessible and affordable. Student debt is a major source of stress and delays a person building and thriving in their adult life. If you have to take on debt to attend college, think about your intended major and motivation for wanting to attend. Higher education services aim to set a student up for the future and achieve — not to burden them.

Like retirement accounts, there is a tax-advantaged tool to grow your child’s college savings. Enter 529 Plans…

A 529 Plan account takes after-tax contributions, and the funds grow and are treated tax-free at the federal level if they are spent on qualified education expenses. Depending on your state, you can earn tax deductions when you contribute to the plan. Account earnings are deferred until withdrawals start. Qualified education expenses include, but are not limited to:

• Up to $10,000 in K-12 tuition
• Student loan payments
• Apprenticeship programs
• Room and board
• University and Graduate school tuition

529 plans are versatile and cover education options outside of just college!

Keep in mind that 529 plans are offered at the state level, so each state has management over their plan options. You can use a 529 plan at more than 6,000 colleges and over 400 international universities, even if they are outside the plan’s state.

Let’s add a twist in — you can create and use a 529 plan for yourself! According to financial services journalist, Amy Buttell you can set up a plan to cover your present or future education expenses if you name yourself the beneficiary. You can use plan funds to cover qualified education expenses as mentioned above, covering trade school fees, certification fees, or degree tuition. And if you ever change your mind, you can change the beneficiary with no tax penalty.

A 529 plan is essentially a saving fund for higher education needs. If you use this account, it is advised to invest in a balanced manner and generate consistent returns to set your child and yourself up for success.

Conclusion

People’s lives inform their goals and relationships with money. Your investment goals and the strategies you use are your own and should reflect your financial situation. We covered a comprehensive goal-setting methodology and information on common investor goals. We hope our exploration of investing goals and a framework will be helpful in your financial planning and journey and in building your best life.