Setting Financial Goals - and How to Invest to Achieve Them

Jul 20, 2021 5 min read

Setting goals is an important part of life. Putting a plan into action and reaching those goals can be exciting and very rewarding. Setting and meeting financial goals is no different, but it might be a little more intimidating. Where do you start? We help you get on the right track to creating your financial roadmap by setting financial goals and making the right investment choices to achieve them.

3 Questions to Ask When Setting Financial Goals

Setting financial goals is an important first step in your financial planning strategy. These three questions can help you and your financial advisor develop an appropriate financial plan. You'll need to think about each one not only in terms of an individual goal, but in terms of your overall finances. Taking time to consider what you want to achieve as a result of your investment process will guide you in determining specific financial goals.

1. What Is My Time Horizon?

In other words, when will you need the money? There are three types of financial goals: long-term, mid-term and short-term. Your time horizon for a particular financial goal will have a significant impact on the type of investments you choose to try to achieve it. Are you investing for your young child's college education, or for your retirement 30 years in the future? Or do you hope to achieve your goal in a shorter time frame? For example, do you want to buy a house in three years, or start your own business in five years?

The general rule is: The longer your time horizon, the riskier (and potentially more lucrative) your investments can be. Many financial advisors believe that with a longer time horizon, you have more opportunity to ride out fluctuations in your investments.

On the other hand, if your time horizon is very short, you may want to concentrate your investments into solutions that fit this timeline better. These short-term solutions may offer a lower return but also greater reassurance about whether the money will be there when you need it.

2. What Is My Investment Risk Tolerance?

Your individual risk tolerance addresses how comfortable you are with the possibility of investment loss, or seeing the value of your investment fluctuate. Many investors would forgo the possibility of a large gain if they knew there was also the possibility of a large loss (these investors are known as risk averse). Other investors, so-called risk seekers, are more willing to take the chance of a large loss if there were also the possibility of a large gain.

It's not always easy to determine where you stand on the spectrum of risk aversion versus risk-seeking within your financial goals, but it's important to try to get an accurate assessment. Before making any investment, you should try to get a sense of just what circumstances might cause you to sell an investment if it began to experience a loss. After all, a financial plan only works if you're able to stick to it. Having an accurate sense of your true risk tolerance will help you develop a plan you can stick with.

Keep in mind that, as noted above, your time horizon can affect your risk tolerance. For example, if you're investing for retirement 30 years from now, you may be more willing to face greater risk in exchange for the potential for a higher return than if you're saving to send your child to college in four years.

3. What Are My Liquidity Needs?

Liquidity refers to how quickly an investment can be converted into cash (or the equivalent of cash). Real estate, for example, tends not to be very liquid; it can take a very long time to sell either residential or commercial real estate. Publicly traded stock, on the other hand, tends to be relatively liquid, though you might suffer a loss if you need to sell when the market is down. Cash and cash alternatives such as money market accounts are extremely liquid (though some types of cash alternatives may be more liquid than others).

Your liquidity needs will affect the type of investments you might choose to meet your goals. For example, if you don't have short-term liquidity needs, you can probably afford to invest in less liquid investments where the potential for gain is much higher than for more liquid investments. However, if you have two children going to college in the next couple of years, you probably don't want all of their tuition money invested in less liquid assets.

When considering your liquidity needs, don't forget to think not just about your liquidity needs for a given financial goal, but your overall liquidity needs. If you have a stable income, excellent job prospects, an emergency cash reserve and no pressing financial obligations, you may have fewer concerns about liquidity than someone with a family and no emergency fund who works in an industry that's experiencing layoffs.

How to Reach Your Investment Goals

Once you've determined your financial goals and how your time horizon, risk tolerance and liquidity needs affect them, it's time to think about how your investments might help you achieve those goals.

Choose the Right Investments

When considering any investment, you'll need to think about what it offers in terms of three key investment goals:

  • Growth: In investing terms, growth (also known as capital appreciation) is an increase in the value of an investment; in other words, you can sell it for more than you paid for it. Your capital is the money you put into an investment initially. If you buy a stock that costs $10 a share and eventually sell the stock for $12 a share, that extra $2 represents capital appreciation, or growth.
  • Income: Some investments make periodic payments of interest or dividends. Those payments represent investment income, which can be spent or reinvested. For retirees, income is a key investment goal, but it can be important for other reasons as well. For example, income payments can help offset the impact of the ups and downs of a growth-oriented investment.
  • Stability: This is sometimes known as capital preservation or protection of principal. An investment that focuses on stability concentrates less on increasing the value of that investment and more on trying to ensure that it doesn't lose value. If you have a short-term financial goal and want to make sure the money is there when you need it, stability might be your primary investment goal.

You may choose to have a single investment goal for a given financial goal, as in the example of making stability a priority for short-term money. Or you may prefer to combine several investments to achieve a balance among stability, income and growth so that you maximize your overall returns at a level of risk that you're comfortable with and that suits your financial goal or goals.

Set Smart Goals

You’re one step closer to developing a successful financial plan. But first, make sure the goals you set are realistic and achievable. Smart investment goals typically have three things in common:

1. Measurable: Your investment goals should be clear, concise and definite. Even something as simple as saving $100 every paycheck is a good goal because it’s measurable. You saved it or you didn’t. Broad or generic goals don’t help hold you accountable.

2. Reasonable: Keeping your goals reasonable and rational helps you ensure your financial goals are attainable. Using different tools, like the time value of money formula, allow you to test whether your rate of saving is sufficient to achieve your goals. Once you know that, you can either adjust your goal or adjust your savings.  

3. Balanced: It’s important when you’re establishing investment goals to remember that money isn’t the only thing that matters. It exists to serve you and should make your life better. Sometimes it’s better to have a lower savings rate and enjoy the journey instead of sacrificing everything to end up leaving all the fruits of your labor behind. The trick to remember when setting investment goals is to make sure you balance your long-term desire with your short-term wants to maximize joy.

Work With a Financial Advisor

Once you have identified your financial and investment goals, you can begin to select individual investments, and think about how to combine all your various goals and investments into an overall portfolio. Our financial advisors will help you get everything sorted and figure out the best course of action to take. Get in touch with us at Farm Bureau to find the right financial advisor for you today.



From materials prepared by Broadridge Investor Communication Solutions, Inc. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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