How to Set Investment Goals to Reach Financial Independence
As seen in The Balance on May 4, 2020
The journey to financial independence is a long one, and it requires a lot of planning and review. Learning to set investment goals is one of the most important things you can do as a new investor because it helps you keep track of where you have been, where you are, and where you are going. These investing goals help you build your long-term road map to financial success.
Qualities of Investment Goals
The best investment goals typically have three things in common:
Good Investment Goals Are Measurable
This means they are clear, concise, and definite. Saying to yourself, “I am going to set a goal of saving $50 per week” is useful because you can evaluate your finances and determine whether you succeeded or not. You either saved $50 per week, or you didn't. In contrast, saying something like, “I am going to set a goal of saving more money each year” is somewhat useless because it doesn’t hold you accountable.
Good Investment Goals Are Reasonable and Rational
If you say that you want to reach $1 million in personal net worth by the age of 40, you can use tools such as the time value of money formula to test whether or not your present rate of saving is sufficient. You aren’t going to get there by putting aside $5,000 a year between the age of 18 and 40 at a historically, reasonably probable rate of return. This means you need to either lower your expectations or increase the amount of money you are putting to work each year.
Make your financial goals concrete, actionable, and measurable.
Good Investment Goals Fit With Your Long-Term Objectives
Money is a tool that should exist to serve you. This message is worth repeating because it never seems to get through to a large percentage of people who are programmed that money is the only thing that matters. Money should make your life better. It doesn’t do you a bit of good to end up with an enormously large balance sheet if it means you have to sacrifice everything of value in your life and end up dying, leaving behind the fruits of your labor for heirs or other beneficiaries who are irresponsible or who have no gratitude for the labor you gifted them.
Sometimes, it is better to have a lower savings rate and enjoy the journey more than you otherwise would have. The trick is to make sure you’re wisely balancing your long-term desires and your short-term wants in a way that maximizes joy. There is no formula for that, as only you can determine which trade-offs you are willing to make.
Important Questions When Setting Investment Goals
When you sit down and begin drawing up your investment goals to reach financial independence, ask yourself the following questions to help clarify some of your implicit assumptions.
Asking these questions can be a particularly useful exercise if you are married. Spouses aren’t aware that they don’t necessarily operate from the same starting point regarding financial matters.
1. What is “your number?”
In order to reach financial independence from your portfolio, how much monthly passive income would it require if you were to withdraw no more than 3% to 4% of the principal value each year? That is the amount of money it would take if you wanted to live off your capital without having to sell your time to someone else while enjoying your desired standard of living. Many experts recommend somewhere around 25 times your annual expenses.
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