If you want to invest smartly, whatever financial goal you set, there are four main things that are important to think about before taking action.
Your time horizon – after how long do you plan to use the money?
Your risk tolerance – In investing, taking more risk means the opportunity for higher returns, but also for greater loss. Think about how much risk you can afford to take according to the time horizon, your financial situation and the specifics of the ultimate goal.
The state of your personal finances – Do you have any money left after you cover your monthly expenses? How much can you afford to spend and how much to save? Do you have funds set aside for contingencies? That’s the questions you need to ask yourself in order to invest smartly.
How much time do you plan to spend – If you want the money saved to increase significantly, you will need to take the time to learn more about investing and the different types of financial instruments.
Otherwise, you risk betting on the accumulated funds “blindly” and losing them.
These factors interact with each other and the success (or failure) of any attempt to raise funds will depend on them. Here is what they will look like in an example situation:
Example: You want to save money and increase it as quickly as possible. But is this mean that you invest smartly or you are just greedy?
In that case, you should be prepared:
(1) Refrain from unnecessary expenses to free up savings resources
(2) Take a higher risk than traditional deposits and savings accounts offer
(3) Set aside some of the savings so that your budget can withstand possible temporary losses
(4) Take the time to explore different options such as investing in stocks, bonds, funds, etc. before deciding how best to manage your funds.
Set a goal for your savings is of a high importance if you want to invest smartly in your future earnings.
It will be much easier for you to stay focused on the four factors we mentioned if you look at them in the context of a specific goal.
Here are 5 sample goals you might recognize:
To support your children by accumulating funds for their quality education
Stop spending 2 hours a day on public transport and be free to go anywhere, anytime, by buying a car
To raise funds for self-participation on a mortgage loan, so that you do not have to withdraw and consumer and sink into debt to the ears, moving to the dream home
Be financially free and never worry about money again
When choosing your personal goals, first let your mind run wild. But then think about what efforts you are willing to make to achieve them. Where the two meet, a truly strong motivation is born.
Let’s look at an example goal and see how different aspects of planning can help make it happen:
Example: I want to buy a car without having to take a loan.
The time aspect: When do I want to buy the car? After 6 months or 5 years? The exact horizon is of great importance for the amount of regular effort we will have to make.
Risk level: Will I be able to manage the risky funds if I want the car after 6 months? And is it reasonable to let them depreciate on deposit if I want it in 5 years? As a rule, the shorter the time to a certain goal, the more conservative we should be about the money for it. The opposite is also true – the larger the horizon we have, the more important it is to find a higher return on our funds.
Your personal finances: How much money do you have to save per month to achieve your goal in 6 months? And in 5 years? Will you have to start earning more, cutting costs, or both?
Motivation or momentum: Will you try to increase your knowledge to find a good return and achieve your goal faster? Will you let the accumulated funds depreciate by inertia?