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Organizing and prioritizing goals

Lesson in Course: Investing basics (beginner, 6min)

We have several investment goals. How do we accomplish them all?

Eureka!

What it's about: Prioritizing helps us stay focused so we can accomplish all of our goals, one at a time.

Why it's important: Each goal will probably have a different investment strategy for reaching that specific goal.

Key takeaway: It's a good idea to take care of our short to long-term must-haves before tackling our other wants.

As we start defining our investment goals, we might quickly get overwhelmed by everything we want to accomplish. However, just because we have a lifetime's worth of investment goals doesn't mean we need to tackle them all in one day.

Instead, we should focus on one at a time. Let's step through a helpful framework for prioritizing and organizing by looking at some examples.

Needs vs Wants

When we have several goals, it helps to narrow down on necessity and prioritize based on how much time we have. If we look at our goals, we can split them easily into a must-have bucket and a want bucket.

Must-have

Must-have goals are those that are the most important that we need in life. 

Needs are the actual things we can't live without

These goals should be prioritized first, and rank them with the most important first.

Example must-haves
  • Emergency fund / Medical expense
  • Retirement
  • Cost of raising kids

Desire / Want

Wants are goals that are nice-to-haves. 

Not every important thing is a need

These goals should be prioritized second, and rank them with the most important first.

Example desires/wants
  • Buying a house
  • Vacations
  • New car

How much time do we have?

A goal's time horizon is critical in developing an effective investment strategy, including the types of accounts we use. 

More time gives us more flexibility

Each goal can have different investment strategies. Once we've separated our goals into must-haves and wants, we can organize them based on their time horizons.  

What is Time horizon?

The amount of time we expect to hold our investments until we need the money back; either short, medium, or long-term

 

Short time horizon

Short time horizons are less than 5 years. With these goals, we'll need to spend the money in the account soon, so we are less concerned about investments that grow quickly since these tend to be risky.

We're likely already planning for these goals right now

Instead, we need assets that aren't likely to drop in value because there isn't enough time to recover. The last thing we want is our investments' value to fall right before we need them.

Example short-term goals
  • Building an emergency fund (must-have)
  • Save for a wedding in 2 years (wants)
  • Buy a new car in 3 years (wants)
  • Go on a dream vacation in 4 years (wants)

Medium time horizon

Medium time horizons are 5 to 10 years. Our investments have more time to grow from compounding by being slightly further out, so we can add some higher-risk assets to our portfolio.

Medium time horizon goals are those that we "should" get to today

The additional risk gives us potentially higher returns to reach our goal, and we have more time to recover losses before our medium-term goals become short-term.

Example medium-term goals
  • Buying a house in 6 years (wants)
  • Take a sabbatical in 8 years (wants)
  • Start a business in 10 years (wants)

Long time horizon

Long time horizons are more than 10 years. Longer-time horizons mean we have a longer time to respond and adjust to mistakes, allowing us to take the most risk. Even though these goals are so far away, we need to start investing early to give as much time for our investments to compound as possible.

Some goals span the rest of our lives

Over time, our long-term goals will transition to medium and short-term, so we'll need to change our investments accordingly.

Example long-term goals
  • Retirement in 35 years (must-have)
  • Paying for a child's college/university education in 18 years (wants)
  • Buying a new house in 15 years (wants)
Prioritizing and organizing goals

Here is one way to prioritize and organize our goals by listing them in the following order:

  1. Short-term must-haves
  2. Medium-term must-haves
  3. Long-term must-haves
  4. Start with whichever short, medium, or long-term want is the most important, and then work down the list.

Circle the highest goal on this list, and we'll tackle that first. Let's start with one, but we'll eventually manage multiple goals as we get more experience. 

 

Actionable ideas

After setting up an emergency fund, retirement is usually the most important must-have investment goal, and it's a great place to begin. Long-term investment strategies can be easier to implement and require less attention to manage. Once you have a goal to start with, it's helpful to break it down into actionable milestones.

Glossary

What is Time horizon?

The amount of time we expect to hold our investments until we need the money back; either short, medium, or long-term