How to Set Investment Goals

Let’s pretend you’re ready to invest some money in something somewhere. You have been saving your pennies over time in a money market fund, CD, or savings account. Hopefully, you’ve been reading enough about savings accounts to know that these are your worst option, just slightly above tucking your money under your mattress. And, if your bank is slamming you with a monthly fee for your savings account, it can be less profitable than your mattress. Your mattress and a savings account (except as a holding fund) will anger the gods of finance and they will smite you for going there.

Let’s also pretend you’ve paid off all those pesky credit card companies and have control of your spending muse. If you haven’t paid off your plastic yet, that should be your first priority. It makes absolutely no sense for an investment to pay out 15% on your money when it’s costing you 25% or more on your plastic. Pay that off first. Listen up, pay that off first. Did you hear? Pay that off first.

Where you invest your money will depend on a number of variables such as your time horizon (when you will need the money), how much capital (money) you have available to invest, and how much of a risk taker you are (money’s not worth a whit if you lay awake all night worrying about it).

Here are a couple of scenarios to consider.

Scenario 1 – You have accumulated $5000 to invest and you have no reserves in the bank other than the $5000. You invest your $5000 in securities, but at the end of a year or so, you suddenly need cash because you spilled hot coffee in your lap while driving and drove your car into a ditch. The car repairs are $2500 so you, being the smart person you are, decide to liquidate 50% of your holdings rather than run up a credit card debt. Unfortunately, the market has a downturn so you are forced to sell your stock at a loss that maybe only leaves you with $1500 invested instead of the $2500 you planned.

Scenario 2 – You accumulate $5000 and you invest 50% in a high risk security, at the end of the second year, that hot shot, low cap company you thought was going to be the next Microsoft goes bankrupt. You just lost 50% of your investment. However, if you have $500,000, and have invested the same amount in that same company, you still have 99.5% of your investment.

Scenario 3 – You’re approaching retirement and want your money to be as safe as possible and also to supplement your retirement income. You hope the principal will provide dividends and interest sufficient to add to your income plus add to the principal sufficient to compensate for inflation. You calculate how much money you need and invest in ways to provide that need while protecting the principle against inflation.

Each investor is unique with a unique set of goals and objectives, however all investors are in hopes of maximizing their ROI (return on investment). No one can tell you which investment vehicle is best for you, but you will be able to do that for yourself when you finish the next few articles. My goal for you is to help you make your own decisions based on accurate information. Financial advisors make mistakes, stock gurus make mistakes, but it’s no skin off their noses if you lose money. You are wise to do your own thinking. Don’t panic, you don’t need to get a degree in economics or hit those fat books on investing strategies. A little reading, a little thought, and common sense are all that you need.

If you have questions along the way, post them so everyone can benefit from the answers.