How to Establish Effective Goals for Investing
Investing can surely be intimidating if you haven’t tried it before. But while you may be nervous about putting your hard-earned money into the stock market or other investments, it's important to remember that investing can potentially be one of the smartest financial decisions you ever make. It is, however, essential to set investing goals so you’re clear on exactly what you're working towards. In this article, we'll go over some of the steps you might take to set goals so you can begin investing with more confidence.
#1: Understand Your Financial Situation
As you go about setting your first investing goal, it’s a great idea to begin by taking some time to assess your financial situation. For example, how much money do you currently have saved? What are your current expenses? What are your sources of income? Knowing the answers to these questions can help you determine what you can realistically invest and how much you'll need to save to reach your goals. There are financial calculator tools online that can be helpful during this part of the process.
#2: Set Small Realistic Goals
A good second step is to establish some incremental goals for yourself. The key here is to make sure they are realistic. Setting small, achievable goals can help lead you toward accomplishing your larger, long-term goals. This might mean starting with a monthly investment of $50, for instance, and working your way up from there.
#3: Determine Your Time Horizon
Your time horizon is defined as how long you have to achieve your investment goals. Are you saving for retirement in 30 years? Or are you trying to save up for a down payment on a house within the next five years? Knowing your time horizon will help you determine what type of investments you should be making. For example, long-term investments like mutual and index funds can arguably be better options for retirement savings, while shorter-term investments like CDs and money market accounts may be better for short-term savings.
#4: Consider Diversifying Your Investments
Diversification means spreading your investments out across different types of assets, such as stocks, bonds, real estate, and commodities. This usually helps to reduce one’s overall risk and can help ensure that you aren’t putting all your eggs in one basket. Consider working with a financial advisor who can help you create a diversified investment portfolio that matches your personal goals and risk tolerance.
#5: Track Your Progress
Finally, consider setting up a way to track your progress toward your investment goals. Regularly reviewing your investment portfolio and making adjustments as needed can be helpful. If you're not on track to meet your goals, then you might consider modifying your investments or increasing your monthly contributions. Remember that investing is many times a long-term game and even small changes can add up over time.
Setting goals can be a very important part of moving toward financial success. By thoroughly understanding your financial situation, setting incremental goals, determining your time horizon, potentially diversifying your investments, and tracking your ongoing progress, you'll likely be well on your way to making smart investments that can help you potentially achieve your long-term goals.
Disclosure: Diversification neither ensures a profit nor protects against a loss.