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How To Set Financial Goals For Investing

Just saving money isn’t enough to set you up for long-term financial success. If you want your money to work for you—rather than you working for money—it’s time to set financial goals.

A survey by the Gallup polling organization found that 30% of U.S. adults are unlikely to set financial goals in 2023. Knowing how to set financial goals for your investments can help you achieve a lifetime of financial stability.

Why Is It Important to Set Financial Goals?

Rutgers Cooperative Extension compares setting financial goals to creating an itinerary for a trip. In both cases, you need to establish a starting point and an end point, as well as a time frame for reaching your destination and an estimate of how much it will cost.

“Without clearly defined goals, it’s easy for your finances to drift away from your targets, and you could find yourself in a difficult financial situation,” says Andy Laino, a certified financial planner (CFP) at Prudential Financial.

When setting investing goals, it’s critical to know two things: your tolerance for investing risk and your time horizon.

Understand Your Risk Tolerance

Risk tolerance refers to the amount of risk you’re willing to take when you’re investing in things like stocks, bonds and funds.

If you’ve got a high tolerance for risk, you’re relatively comfortable with the chance of losing money in exchange for the potential to achieve higher returns. This makes you an aggressive investor.

But if you’ve got a low tolerance for risk, you prefer investments that aren’t likely to lose value. This means you’re a conservative investor.

If you have more time for your investments to recover from a potential loss, you can invest more aggressively. If you might need funds immediately and can’t afford for your investments to lose money, you’ll need to be more conservative.

In other words, the more time you have and the more aggressively you invest, the less you’ll have to invest.

Know Your Time Horizon

Time horizon refers to the number of months, years or decades you plan to hold onto an investment before selling it in order to achieve a certain goal.

Your time horizon is dictated, in part, by your financial goals. For instance, if you hope to buy a home in the next five years, your time horizon for the amount you’re investing for the home is five years. But if you’re aiming to retire in 25 years, your time horizon is 25 years.

6 Steps for Setting Financial Goals

1. Review Your Finances

To set financial goals, you need to figure out how much you can afford to save for each goal given your current spending levels.

Ideally, you should also see how much extra you could contribute if you optimized your spending and cut discretionary expenses.

Laino recommends combing through your income, expenses and debts, and then setting up a budget to keep on top of your financial matters and figure out ways to save money.

Ed Walters, senior vice president of the Lincoln Financial Network, the wealth management arm of Lincoln Financial Group, suggests relying on budget calculators and other money management tools to develop and stick to your budget.

“Keep it simple,” says Walters.

2. Divide Your Goals into Separate Buckets

Divide your financial goals into short-term, medium-term and long-term objectives:

  • Short-term goals. This might be saving enough money to fly to Hawaii for a family vacation. Experts don’t agree on the length of time attached to a short-term goal. For instance, the University of Chicago says a short-term goal can be achieved within a year, while the Council for Economic Education says a short-term goal can be achieved in fewer than two months.
  • Medium-term goals. This could include stashing enough money for a down payment on a new home. The University of Chicago assigns a one- to five-year span for a medium-term goal, whereas the Council for Economic Education puts it at two months to three years.
  • Long-term goals. Your biggest long-term goal should be investing for retirement. The University of Chicago says it takes at least five years to achieve a long-term goal, but the Council for Economic Education says it takes at least three years.

Laino recommends establishing specific, measurable short-, medium- and long-term goals for investing. For instance, rather than vowing to simply save money, he suggests committing to investing, say, a total of $5,000 over the course of two years.

3. Prioritize Your Investing Goals

Once you’ve set your goals for investing, it’s time to prioritize them.

“Prioritizing your goals will help you determine which goals you should focus on first and then, once achieved, allows you to move on to the next,” says certified financial planner Jennifer Garcia, a private wealth financial advisor at Wells Fargo Advisors.

It’s easy to prioritize short-term goals over long-term objectives, but make sure to take stock of which is the most important. Saving up for a boat in five years gives you enjoyment sooner, but don’t do it at the cost of saving up for your kid’s college education in ten years.

As part of this step, you should understand the motivations behind your financial goals, says certified financial planner Ashley Sullivan, a private wealth advisor at LVW Advisors.

“Being able to understand the true driving force behind your goals helps create that prioritization of the most important to the least important. When heart and emotion are involved, it may increase the likelihood that the goal is met,” Sullivan says.

4. Determine How to Achieve Your Goals

Your goals won’t achieve themselves, so you need to establish an action plan to turn your goals into reality, says Laino.

“Include the steps you are committed to taking to reach each goal and a timeline you set for yourself to accomplish each step. Post the action plan in a visible location to remind you of the steps you are taking,” he says.

Among other things, your action plan should pinpoint how you’ll allocate money toward achieving your goals. For example, Walters recommends earmarking money from every paycheck for an emergency fund, college fund or employer-sponsored retirement plan.

Of course, you’ll need to choose different vehicles for setting aside that money, such as a high-interest savings account, certificate of deposit (CD), 401(k) or IRA.

As it relates to retirement, Sullivan says you should decide how much to contribute based on your age, income and future financial picture (such as how much money you expect to receive from an employer-based retirement plan or the Social Security program).

5. Monitor Your Investing Progress

To stay on track with your goals, Laino suggests recording your progress in a journal, ledger, spreadsheet or personal finance app. This can help you adjust your income and expenses as needed.

“Celebrate your successes. Acknowledge your progress and reward yourself when you reach a goal,” Laino says.

For inspiration, surround yourself with reminders of your financial goals, says Garcia. “For example, if you’re saving for a new house or big trip, keep a picture of your ideal home or vacation destination near your mirror,” she says.

6. Revisit Your Investing Goals

Experts recommend regularly reviewing your financial goals and your overall financial plan.

“The plan should be revisited anytime you have a meaningful change in your life or financial situation.
Review the plan often to ensure any priorities, life circumstances or financial factors that have changed are accurately reflected,” Sullivan says.

You might want to conduct this review when you visit with a financial advisor. Research by Walters’ company, Lincoln Financial Group, shows consumers who tap the expertise of financial professionals report being more successful in meeting their goals.

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