Discovering what’s important to you and what you are willing to invest time and money into is an important first step. Before you actually invest your money, you should spend some time considering and setting your personal financial goals. For example, do you want to retire early? Would you like to start your own business soon? Do you need to pay for your children's college education? Would you like to buy or build a new house?
Determine Your Financial Goals
Ask these 3 questions before starting your financial plan to help create a stronger plan for your short- and long-term goals. Once you've determined your financial goals and how your time horizon, risk tolerance, and liquidity needs affect them, it's time to think about how your investments might help you achieve those goals.
When considering any investment, you'll need to think about what it offers in terms of three key investment goals:
- Growth In investing terms, growth (also known as capital appreciation) is an increase in the value of an investment; in other words, you can sell it for more than you paid for it. Your capital is the money you put into an investment initially. If you buy a stock that costs $10 a share and eventually sell the stock for $12 a share, that extra $2 represents capital appreciation, or growth.
- Income Some investments make periodic payments of interest or dividends. Those payments represent investment income, which can be spent or reinvested. For retirees, income obviously is a key investment goal, but it can be important for other reasons as well. For example, income payments can help offset the impact of the ups and downs of a growth-oriented investment.
- Stability This is sometimes known as capital preservation or protection of principal. An investment that focuses on stability concentrates less on increasing the value of that investment and more on trying to ensure that it doesn't lose value. If you plan to spend a certain amount of money soon and want to make sure the money is there when you need it, stability might be your primary investment goal.
How They Work Together
With each individual investment, there is a relationship between growth, income, and stability. The more an investment offers in one of those areas, the more you may have to trade off in terms of the other two. The key to setting investment goals is to tailor each investment to what you want it to do for you.
You may choose to have a single investment goal for a given financial goal, as in the example of making stability a priority for short-term money. Or you may prefer to combine several investments to achieve a balance among stability, income, and growth so that you maximize your overall returns at a level of risk that you're comfortable with and that suits your financial goal or goals.
Additional Questions to Consider
- How much money do you have to invest?
- What are your sources of investment capital? Do you have a lump sum, or will you be investing regularly and systematically?
- How much profit do you need an investment to generate?
- What is your current income tax bracket?
Once you have identified appropriate financial and investment goals, you can then begin to select individual investments, and think about how to combine all your various goals and investments into an overall portfolio.
Contact a Farm Bureau financial advisor today to get started creating your customized plan and investment strategy. We’ll work together to help you create a roadmap for your future.