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Creating investment goals

Lesson in Course: Investing basics (beginner, 4min)

Goals are essential to successful investing. So how do we come up with them?

Eureka!

What it's about: The SMART framework helps us come up with well-defined investment goals.

Why it's important: Reviewing our goals give us feedback about whether our investment strategy is working.

Key takeaway: When starting, be specific but don't worry about being overly accurate. We're creating a target that we'll adjust later.

We use investment goals to guide our decision-making. However, our lives hardly hold still, so our plans will change as our financial situations change over time. When creating goals for the first time, we don’t want to focus on laser precision, especially for longer-term goals, because there are too many unknown variables. It’s better to start with a reasonable ballpark target that we’ll revisit and adjust periodically to make them more accurate over time.

Steps for defining investment goals

Steps to align our investing priorities

Identifying goals

Start by writing down our goals. It doesn’t matter if we put them on paper, a Google Doc, or use an app. We should break our goals into short, medium, and long-term, then prioritize them. The point is to have them available for review later to track our progress or change them.

  • Short-term goals are less than 5 years
  • Medium-term goals are 5 - 10 years
  • Long-term goals are more than 10 years

SMART framework

Goals should be specific, measurable, actionable, realistic, and time-bound.

Plan of action

As part of creating our goals, we should form an action plan with steps to follow to help us execute these goals.

Our action plan should include the following:

  1. Prioritize our goals
  2. Set milestones for each goal
  3. Set calendar reminders to review our goals

Review

Regularly review our goals! As part of our plan of action, setting time to revisit our goals often gives us a sense of progress and helps us stay motivated, especially with long-term goals like retirement. 

Routine review helps us achieve our goals

Monthly reviews will help us get an initial understanding of what's happening and if we need to make adjustments. Over time with more experience, we can stretch out these reviews to quarterly or yearly.

 

SMART in practice

Let’s walk through a few examples of SMART investment goals for someone who might be around 30 years old.

Retirement

A SMART goal might be to save at least $500,000 for retirement by 65 years old. 

  • It’s specific - we know the money is for retirement and exactly how much we want to save.
  • It’s measurable - we know we’ve reached our goal when we’ve saved $500,000.
  • It’s actionable - there are practical steps to hit our goal, such as how much to save each month, which accounts to save it in, and what investments to make.
  • It’s realistic - while $500,000 might not be reasonable for everyone or everywhere, we can adjust this amount to what makes sense for our financial situation.
  • It’s timely - we have a timeframe, by 65 years old, to track our progress, helping us decide if we need to make any changes along the way.

The action plan for this goal might look something like this:

  1. Save $500 per month in a retirement account.
  2. Invest in a broad mix of ETFs and mutual funds.
  3. Learn more about investing for retirement on Archimedes.
A big purchase

A big purchase could be for something like a car, a house, a wedding, or even a child’s college education. Let’s say our goal is to save at least $80,000 for a 20% down payment on a $400,000 home in 5 years.

  • It’s specific - we know what the money is for buying a house and exactly how much we want to save.
  • It’s measurable - we know we’ve reached our goal when we’ve saved $80,000.
  • It’s actionable - there are practical steps to hit our goal, such as how much to save each month, which accounts to save it in, and what investments to make.
  • It’s realistic - while $80,000 might not be reasonable for everyone or everywhere, we can adjust this amount to what makes sense for our financial situation.
  • It’s timely - we have a timeframe, in 5 years, to track our progress, helping us decide if we need to make any changes along the way.

The action plan for this goal might look something like this:

  1. Save $500 per month in a brokerage account.
  2. Invest in a broad mix of ETFs and mutual funds.
  3. Learn more about investing on Archimedes.
Extra income

Investments can generate income that we can use to pay for our lifestyles, such as vacations and travel. Let’s say our goal is to have our portfolio provide investment income of at least $1,000 annually in 4 years to pay for trips and adventures.

  • It’s specific - we know the money is for our lifestyle and exactly how much income we want our portfolio to make.
  • It’s measurable - we know when we’ve reached our goal when our portfolio provides investment income of $1,000 per year.
  • It’s actionable - there are practical steps to hit our goal, such as how much to save each month, which accounts to save it in, and what investments to make.
  • It’s realistic - while $1,000 might not be reasonable for everyone or everywhere, we can adjust this amount to what makes sense for our financial situation.
  • It’s timely - we have a timeframe, in 4 years, to track our progress, helping us decide if we need to make any changes along the way.

The action plan for this goal might look something like this:

  1. Save $300 per month in a brokerage account.
  2. Invest in a broad mix of ETFs and mutual funds.
  3. Learn more about income-generating investments on Archimedes.
 

Actionable ideas

Why are you investing? What do you plan to do with all the money you're going to make? Defining your investment goals is critical to your success. Try writing them down using the SMART framework. You can use them later to come up with your investment strategy, take action, and measure your progress over time!

Supplementary materials

This video talks about the importance of starting with the right investment goals
https://www.youtube.com/watch?v=jOryoROUgpc&ab_channel=SmartZoneFinance

Glossary

What is SMART framework?

A framework to create well-defined investment goals that are specific, measurable, actionable, realistic, and time-bound. For example, to save at least $500,000 for retirement by 65 years old.