Everyone has goals, especially those investors who are looking to get some kind of profit out of their trading: and that’s what all investors are gunning for. For this reason, it seems like a no-brainer that goal-based investing would make perfect sense. Are you stuck wondering what goal-based investing could even mean? Most traders out there have never really thought about the goals they might have or the ways they can make those goals a reality. Keep reading to learn more about goal-based investing!
How Does it Usually Work?
Most people will end up utilizing their 401(k) plan to invest. This type of investing is usually initiated with a risk quiz that seeks to determine how well you can sustain certain losses. The younger you are, the higher your risk tolerance will be. A younger person of 30 has much more time to recover money that could potentially be lost than a 55 year old person does. The risk quiz will also address the timeline of your goals over a number of years. Once you’ve completed the quiz, you’ll be asked to choose from a varying list of investments. All you’ve got to do now is put away a little towards your 401(k) with every paycheck. As time passes you by, you should be able to see your 401(k) growing to give you a cushion you can support yourself with when it’s time to retire
A lot of investors out there see “target-date funds” as the best way to save for retirement. They’re extremely simply to maintain: all you have to do is pair up the date of your retirement with the date on the fund and you’re all done. Most people seem to go after target date funds because they clearly have retirement defined as the vague goal, but the downside to this kind of fund might be the fact that there’s no planning behind how much money you’ll actually need to gain before you reach retirement. If you’ve ever heard of a “back of the envelope” estimation tactic, you should know that this method is a little better but it still doesn’t require you to plan for the amount you need to eventually have in this fund before you need to survive off of it during your non-working life. When it comes to retirement saving, you have to have precise, accurate figures in your head or you won’t really get too far in the game. The only person that will suffer for your carelessness is you!
Work Better, Work Smarter
Goal-based investing is the best way to plan for retirement by being blatant and clear about what you expect. Retiring is probably a goal for everyone, but goal-based investing is about retiring at 55 and being able to put that intention out there. Being honest and somewhat ambitious is what makes us want to achieve our personal goals that much more. Setting the goal at retiring at age 55 is great, but there is a lot of calculating that has to be done to make that realistic. Work out the costs of all of your bills for a month and see what you come up with. Overestimate that cost by taking an enthusiastic guess about how many years you might live. It’s possible that you could live to be 100, so you have to focus on being able to have enough to sustain yourself each month for the rest of your life. Once you’re almost 68, Social Security benefits will kick in, but you should still strive to have as much excess as you can manage. If there are ever any changes in your income, you could always relocate to a smaller home in a less expensive city if you felt the need. There are ways you can cut down on the expenses you face every month if you take it upon yourself to be creative.
This is where the goal-based investing gets real serious. You have to find out how much money you need to save each month and how much in returns you need to be pulling in from your investments. This will be the most important aspect because you’ll be able to take an honest look at how much you can spend on investing and otherwise. This isn’t about any projected figures that were really just guesses: this is all about you knowing where you can and cannot stretch financially.
Goal-Based Investing is Better
Goal-based investing works so well because you can break big financial worries down into more manageable sections. If you want to save $60,000 for a down payment on a home, you can really look at that as saving $5,000 to $10,000 each year for 6 to 12 years. You might have to shift some other things around in your life, but you can get your goals in all aspects of your life checked off your list.