Life is full of goals and dreams, and for most people, investing is the key to achieving them. Years of data gathered by academicians and economists show that if you remain consistent and diligent, investing can provide you with a much higher return on your money than simply holding your money in a savings account. Some common life goals you can achieve through investing include creating a passive income stream, taking a career break, owning a home, financing your kids’ education, retiring, or starting a business.
However, before discussing each of those goals you can achieve through investing, you need to understand what financial goals are and how to break them down based on time frames.
Financial goals are like any other personal goal you set for yourself, like losing weight or achieving a promotion at work. However, the characteristic that makes them different from other sorts of personal goals is that financial goals revolve around money. So, for example, if you want to start a business 10 years from now and require X amount of euros to start it, that is a financial goal.
Categorizing Financial Goals
- Short-Term Financial Goals (3 months to 3 years): As the name suggests, a short-term financial goal is a money-related goal you want to achieve in the near future. For some, that near future might be in 3 or 6 months; for others, it might be between one and three years. To keep things simple, we have classified any financial goal you want to achieve in the next three months to three years as a short-term financial goal. Examples of such short-term financial goals may include paying off your credit card debt, building an emergency or rainy day fund, saving for a short-term holiday, or even accumulating money for a ring you want to give your fiancé while proposing.
- Medium-Term Financial Goals (3 to 10 years): Medium-term financial goals are those money-related goals that take longer to achieve than short-term financial goals, but are not so far in the future that you need to wait for decades to achieve them. Again, to keep things simple, you can classify any financial goal you want to achieve in the next three to ten years as a medium-term financial goal. Examples of medium-term financial goals may include, paying off student debt, renovating your home, paying the down payment for your first home, or having enough money to meet your wedding expenses.
- Long-Term Financial Goals (10 years+): Any financial goal that can take several years or even decades to achieve can be called a long-term financial goal. However, the basic rule of thumb is that if a financial goal takes more than ten years to achieve, you can straight away put it in the long-term financial goal bucket. Examples of long-term financial goals include paying for your kid’s education, buying a house or a vacation home, creating a passive income stream, building wealth, or creating a corpus to live off after retirement.
How to Set Financial Goals
When setting financial goals, it is important to be realistic. When you are planning financial goals, make sure they are achievable, specific, and measurable. It is also critical that you classify each of your financial goals as short-term, midterm, or long-term. You must also make sure to allocate a portion of your money to each goal individually to ensure that you achieve all your goals. This can be done through budgeting and setting aside money for each of the goals.
Life Goals That You Can Achieve Through Investing
Having understood financial goals and how to set them, we are now ready to discuss all the life goals one can achieve through investing in detail. So, let’s go through them one by one.
Passive Income Stream
Any income you earn for which you don’t need to put in too much time, labour or effort is usually classified as passive income. While in today’s world, there are multiple ways to generate passive income, there is still no better way to do it other than through investing. Investing early and regularly, especially in the stock market, can help you build a large portfolio over the course of 15-20 years that can meaningfully supplement your income and help you achieve financial freedom.
When you start investing for passive income, initially, it may seem like a daunting task. For example, if you manage to invest 4,800 euros in stocks or ETFs over a year, the dividend income that such an investment will generate over the next year – 1-3% or €48-144 – might seem insignificant as passive income. However, you need to understand that investing is a long-term game, and compounding shows its real magic only after several years.
Now take the same example above and ignore the dividend income your investment generated over that year. This time, just assume that you keep on investing €4,800 every year over the next 20 years and also reinvest any dividends you receive during that time. Now, we all know that over the long run, most stock markets in well-functioning economies have delivered a return of between 8-12%.
In our example, let’s be on the conservative side and assume that over the next 20 years, the average return (dividends plus price appreciation) your investments will generate will be 9%. If you take an annuity calculator and feed in the numbers we have assumed in this example, you will find that in 20 years, your investment portfolio will be worth €245,568. An investment portfolio of that size will generate, on average, €22,101 in returns (assuming the same 9% interest rate) for you even if you don’t invest or reinvest any more money, which is not a small sum of money by any stretch of the imagination. Even if you only consider the dividend income, your portfolio would generate €2,455-€7,365 just in dividends each year.
Taking a Career Break
If you have worked at a job for a considerable period of your adult life, chances are that you have contemplated taking a career break at least once. It could be for whatever reason: you might want to give that hobby of yours a shot at becoming a full-time profession, travel and explore new places, or take some time for yourself to learn and develop a new skill. Regardless of the reason, taking a long career break often never turns into a reality for most people. And the reason for that is simple — they don’t plan their finances in advance. That’s where investing comes in. If you want to take a career break, start investing today, and in a few years, you will end up achieving that dream of yours. Because everyone’s idea of a career break is different and hence the money they would require would be different, here are a few general tips that anyone can follow on how to invest for a career break:
- First and foremost, it’s important to set an investing budget and stick to it. Before planning a break, it’s important to assess your financial situation and determine what you can comfortably afford to invest and whether it will be sufficient. You must ensure that your investments are able to cover your expenses during the break while still having money left for when you return.
- Evaluate your risk tolerance and decide how much risk you’re comfortable taking. Knowing this will help you make informed decisions when it comes to choosing investments.
- Once you’ve determined how much money you can afford to invest, it’s time to decide where to invest it. When it comes to investing for a career break, it’s important to remember that the goal is to preserve capital and generate income. You’re not looking to get rich quick; you’re looking to have enough money to live off of during your break without sacrificing your long-term financial goals. As such, it’s important to choose investments that are low-risk and have a history of generating consistent returns.
You can consider investing in low-cost index funds or ETFs, which are a great way to diversify your portfolio without breaking the bank.
Home Ownership
Investing your money is one of the best ways to achieve your dream of homeownership. Owning a house is an important milestone that can provide a sense of stability and security, especially as you get older. With smart investing and careful planning, you can accumulate enough money to pay the down payment on a house or even buy it outright.
The first step towards turning this dream of yours into reality starts with knowing how much you will need to pay to buy the house, in how many years you want to make the purchase, and how much money you need to start investing with today to realise this dream. Because everyone’s circumstances are different, we won’t get into the details of each scenario, but rather, let’s take a general example.
Europe is a very big continent with many cities that have different living standards and, as a result, a wide range of housing costs. To keep things simple, let’s say you want to purchase an apartment that costs €250,000 today and, assuming an average inflation rate of 3% per year, will cost around €450,000 in 20 years. If you want to buy that house outright without a mortgage or a loan, you will need to accumulate €450,000 in 20 years. Now, staying consistent with our previous example, let’s say you start investing your money today, and in the long term, your investments generate an average annual return of 9%. If you take the help of the free calculators available on the internet today and feed in these numbers (assumptions), you will find that you will need to invest €670 each month to accumulate that money in 20 years.
You can do this same calculation for your individual scenario depending on how much you can invest, what the price range of the house you are looking for is, after how many years you want to buy the house, and whether you want to purchase the house outright or just accumulate enough money for a down payment.
Financing Your Kids’ Education
Investing can be a great way to finance your children’s education and give them the best chance to succeed in the future. By investing early in your child’s life, you can capitalise on the power of compound interest to build up a larger sum of money by the time they’re ready to go to college.
Investing can also provide tax benefits. In most countries today, many investment products and plans are available that allow tax-advantaged investing for retirement or college education, meaning that you can take advantage of deductions and other credits to reduce your overall tax burden. This can ultimately help you save more money to put towards your children’s education.
When you start investing for your kid’s college education, the initial steps you need to take will be the same as those we have discussed before. First, you need to set it as a financial goal and come up with an estimate of the money you will require in the future, and then figure out how much you need to start investing from today onwards. We know that the cost of education varies across Europe and around the world. However, for EU residents, getting an undergraduate or graduate degree in Europe is generally cheaper than in most countries in the developed world. Therefore, you won’t need to break the bank to finance your child’s college education.
If you take into account that, on average, each year of tuition and living expenses comes to around €20,000-25,000 and factor in inflation at 3%, you will need approximately €34,000-40,000 to fund each year of your child’s college education 18 years from now. Again, using an online calculator, you can calculate that all it will take you is €70-80 of investment each month to fund each year of your child’s education. That’s the magic of investing!
Retirement
Investing is unarguably the best way to build a comfortable corpus that you can live off during your retirement. With proper planning and a sound investment strategy, you can put yourself in a position where you don’t need to depend on anyone, even the government, to live a decent lifestyle during retirement. Here are a few tips that anyone can follow to build a comfortable nest egg for retirement:
- Because retirement is one of the most important and common financial goals most people plan to achieve, it is essential to create a dedicated plan for it.
- This plan should include a timeline of when you want to retire and how much money you will need to comfortably cover your expenses. It is important to factor in inflation and any other costs that may arise in the future.
- Once you have a plan in place, you can start thinking about which investments will be most beneficial for achieving your retirement goals.
- You don’t need to invest in complex assets or investment strategies to build a significant corpus for your retirement. Just a simple portfolio consisting of stocks, ETFs, and bonds in which you invest regularly will be sufficient for that purpose, provided that you do asset allocation right.
- If you don’t know what asset allocation is or how to do it correctly, depending on your age, you can take the help of the robo-advisors online. Most robo-advisors charge a minimal fee but provide invaluable assistance, especially to people saving for retirement.
When investing for retirement, most people forget how important it is to start early. Again, let’s take an example to understand how and why it matters so much. Consider Jenny, a 25-year-old pharmacist who earns €3,500 monthly after taxes. One day, Jenny decides to create a dedicated investment account for her retirement, in which she will put €500 each month no matter what and won’t take money out of it until she retires. If Jenny wishes to retire at 65 and her investment grows at an average annual rate of 9%, she would have saved over 2 million euros by the time she retires!
Now, in place of Jenny, consider Peter, a pastry chef working at one of the finest restaurants in your city. Peter is 35, makes €6,000 a month after taxes, is married, and has one kid. It’s only now that Peter has realised that he needs to invest money for retirement and that he can only afford to invest €500 each month. If Peter starts investing that same amount of money now and his investments end up earning the same average annual return as Jenny’s, he will still only have around €820,000 by age 65. Compare €820,000 with €2 million.
Starting a Business
Starting to invest is a great way to secure your financial future and have enough money to start your own business. It won’t happen overnight, but with the right plan and dedication, it is possible to save enough money to become an entrepreneur.
The first step, as always, is to start investing a portion of what you earn each month. Of course, setting aside a part of your money into an investment account can be difficult, especially when you can do so much with it today, but remember that you are doing it to achieve your goal. And without staying committed and disciplined, you can’t accomplish any goal.
So, let’s take another example. Let’s say you want to open a coffee shop in your city and estimate that it will cost you around €100,000 to lease a small shop, buy the equipment and the furniture, and have sufficient money to cover expenses for 3–4 months before you break even. You might not have that €100,000 today, but you have decided that you want to open that shop 8 years from now and have made it a financial goal. In 8 years, assuming a 3% inflation rate, you would require close to €127,000 to open the same shop. Now, because ten years is not exactly long-term, you decide to invest 50% of your money in safe corporate bonds that pay 4% and the rest in stocks. If we assume that your stock investments end up making an average of 9% per year, then you will need to start investing around €1,012 each month. Please remember, in our calculations, we have made a lot of assumptions, and nothing comes with a guarantee when you invest. However, do also understand that it can take a few months more or a few months less, but you will end up achieving your goal if you remain consistent and dedicated.
The Repercussions of Not Investing
Those people who do have the resources, and still choose not to invest, will always be at a significant disadvantage compared to those who do. Without investing, you are not only missing out on the potential to increase your wealth, but are also depriving yourself of the financial security you will need in the future.
This is especially true as the cost of living continues to rise and costs such as health care, housing, and education become more expensive. Without investing, you may find yourself unable to meet your future needs. To avoid such scenarios, you must begin your investing journey as early as possible, and the first step towards investing always starts with setting up personal financial goals.
Summary
Investing is a great way to achieve your financial goals. It can help you take a career break, purchase a home, finance your child’s education, start a business, and even retire comfortably. With proper planning and a good understanding of the risks and rewards of investing, you can create a portfolio that meets your financial goals. You can choose from various investment vehicles, including stocks, bonds, mutual funds, ETFs, and other options. However, always remember to diversify your portfolio to reduce risk and maximise return. Additionally, before investing in any asset, you must always evaluate your risk tolerance and time horizon. With the right approach, you can achieve all your financial goals and live a comfortable life.
What are Financial Goals?
Financial goals are targets that you set to achieve financial success in life. They are a clear-cut vision of the kind of financial future that you want to have. They could be short-term or long-term goals, depending on your individual circumstances. Your financial goals could include saving for retirement, getting out of debt, investing in the stock market, or building an emergency fund.
How Much Should You Invest to Achieve a Financial Goal?
The amount you should invest will depend on the type of investment you are making, the amount of risk you are willing to take, and the timeline you have in mind. You should also consider the amount of money you can afford to invest, as this will determine how quickly you can reach your goal. Generally, the more you invest, the sooner you can reach your financial goal.
Should You Save or Invest to Achieve Your Financial Goals?
Saving and investing are both important components of any financial plan. Saving provides a cushion in the event of an emergency, while investing can help you achieve long-term financial goals. When deciding whether to save or invest, the best approach is to do both. Start by creating an emergency fund to cover unexpected costs. This should be a priority over investing. Once you have a secure savings plan in place, you can then focus on investing to achieve your financial goals. Remember, investing can provide a better return than savings, but it also carries a greater level of risk.
List of References
- Source: calculator.net
