Setting a goal before making your first investment can make you a more successful investor. You hear this all the time, but you may not get a lot of advice when it comes time to actually set them.
Creating a goal starts with thinking about a future accomplishment you hope you'll reach, but properly setting one is much more detailed than that. Making sure your goals all share these five traits will help you up your investing game in 2021.
Your goal should be specific and leave no room for interpretation. Saving more money is something you can aim for in 2021. But technically, you can achieve it by saving a dollar more next year than you did this year. How much of an impact would that have on your overall financial picture?
A goal of saving $1,200 each year is more defined. You can make it more specific if you break it down even further. Maybe you'll achieve the $1,200 a year by saving $600 twice a year, $300 quarterly, or $100 monthly. The method you use will be unique to you, but you might find that achieving it is easier when your plan is more targeted.
Making your goal specific will help you gauge whether or not you're doing what you said you'd do, and modify as needed. If you decide that you'll save $100 each month, you'll either meet this goal, exceed it, or come up short.
If doing it is easy, you can potentially save more each month. If it's too hard and you're consistently missing your mark, you can adjust it downward.
Goals that encourage hard work are great but should always be within your reach. Imagine that you make $45,000 a year and have a goal of saving $25,000 in 2021. Unless you have no bills or other expenses, saving more than half of your pre-tax income might prove difficult.
Using a rule of thumb like seeking to save 20% of your after-tax income might make your goal more attainable. If you end up easily saving this much, you can always increase it. But if you try to save more than you can actually afford, you run the risk of dipping into your savings anytime you run into a cash crunch.
You want goals that you can realistically meet. You can decide that buying individual stocks and bonds is how you'll invest, but if you don't know how and have no experience doing it, you may find yourself intimidated by it. Rather than investing money like you said you would, you may end up frozen and as a result, don't take any actions. You may even give up on your goal completely.
Instead, starting off with easy vehicles like ETFs and index funds will help you get started while you build up your investing knowledge. As you become a more seasoned investor, you can change the structure of your investments and begin buying more individual stocks and bonds.
Your goal should have a time horizon. Building your emergency fund is a good goal, but saying you'll build it within 12 months makes it timely.
You can have long and short time horizons. You might have the goal of saving $1 million dollars for retirement in 30 years or $100,000 for your child's education in 18 years. Maybe it's a shorter goal like saving $200,000 for the down payment on a house in five years or $30,000 for the purchase of a car in one year.
Whatever your goal is, just make sure that it has an endpoint. Giving it an endpoint will help you work backward and best figure out how you'll get there. It will also help you make sure it's a priority.
Goal setting is a very important part of the investment process. Using these guidelines will help make tracking your progress easier and your journey to your final destination more straightforward and predictable. The more specific, measurable, attainable, realistic, and timely they are, the more likely your chances of meeting your goals.