How Do You Guarantee Investment Growth?
Let’s say your cash flow is set and you have extra money at the end of the month. Now you need to establish a plan to grow that money. You also need to keep in mind the reason (or reasons) why you want more money in the first place.
This is the essence of goals-based financial planning — but how to do you go about setting an investment goal, and work toward it by achieving investment growth?
The Key to Setting an Investment Goal
Why are you putting money away? Is it to start a business? Buy real estate? Save enough so you can achieve financial freedom later in life?
Your goals should come with specific reasons why they’re important enough. That makes them tangible, measurable, actionable, and attainable. If your goal is something like, “I want more money,” then why do you want more?
Getting clear on this is also important to being happy in pursuing your goals and enjoying them when you achieve a milestone. If you just want more money, there’s never going to be enough — there’s no end, because you can always want “more” money.
Not only do you need to know why for your own sake, but knowing why also impacts how successful you’ll be at implementing your financial plan for another reason.
Asking why is a critical step in good planning that many people miss. It helps you determine how you should invest the money assigned to each goal.
Goals need deadlines. Asking why helps determine those, too.
If you don’t know when you want to accomplish your goal, take some time to think about that and decide. The amount of time between now and your goal date provides valuable insight into whether your money should be saved in a bank account or invested for growth.
We all want our money to grow. The better we are at increasing our wealth, the more of our financial goals we can accomplish… and the sooner we can accomplish them.
But you need to keep in mind that it’s not as simple as looking for the investment that will give you the highest return. For one thing, return has an ugly twin called risk, and you need to understand them both before you invest.
You Need to Understand Risk Versus Return if You Want Investment Growth
Simply defined, risk is the possibility that you will lose money. It also indicates how much of it you might lose.
In the world of investments, your goal is to find the highest return for the least amount of risk. The problem is that it’s the opportunities that promise a big return for little risk that usually fit into the “it’s too good to be true” category.
Once you find various investment opportunities with an acceptable risk/return relationship, you have to make sure that the time frame for the expected return aligns with your goal date.
Remember, the amount of time between now and the date by when you’d like to achieve your goal is important. Here’s why that’s true:
Let’s say you want to start a business in 2 years and you need to have $20,000 in startup capital to launch your venture. You currently have $8,000 set aside as a base. Where do you put that money to effectively grow it to $20,000?
It would be nice if you could find an investment that would provide a 50% return for the next 2 years. Then you’d simply be able to throw another $2,000 of your own money into the account and you’d be all set.
(An annual return of 50% compounded over 2 years would bring your initial $8,000 up to $18,000.)
But it’s usually not that easy in the real world. There are very few investments that will provide this type of return over a long period of time, never mind over a 2-year time frame.
You’d even be hard-pressed to find a 10% return for such a short period.
Even if you did, it certainly wouldn’t mean guaranteed investment growth, and it would probably come with a high degree of risk. You may end up losing 50% instead of gaining.
Rather than hitting the $20,000 mark in 2 years, you might have a whopping $4,000 in your investment account instead.
Not really the ideal outcome.
What to Do When You Want Investment Growth
Considering this, what should you do? You have a few options:
- Decrease the goal amount. If you cut the $20,000 in half, you can get to $10,000 by saving $1,000 each year for the next 2 years. (Remember, you already have $8,000 in the bank.) No investment (and therefore, no risk) needed.
- Extend the goal date. Rather than launching your company in 2 years, maybe you do it in 8 years. With this type of time horizon, you have more investment options because you don’t need a huge return. In fact, if you found an investment that returned 5% per year for 8 years, and you invested an additional $1,000 per year of your own money, you’d have over $21,000 by your goal date 8 years from now.
- Save more money. You could also take out the risk by increasing the amount you save each year. By tightening up your proverbial financial belt, you might be able to save $6,000 each year for the next 2 years, allowing you to hit the $20,000 mark right when you want to launch.
There are many variables that come into play with regard to achieving financial goals, and we only touched on a few. The important thing to remember is that you need to understand the basics of each goal, including:
- What is my goal?
- How much does my goal cost?
- When do I want to achieve my goal?
Once you establish this basic framework, you can use a goals-based investment strategy to align your investment choice to each goal. When you do, remember that there’s a direct correlation between risk and return.
Without understanding the risk/return relationship of an investment, you may be setting yourself up for failure.
Do the proper planning, educate yourself, and head for success with your investments and your goals.
Need help with your planning? Reach out and schedule a free 30-minute discovery session. We’ll talk about what you want to achieve, how you might be able to do it, and if ongoing financial planning support makes sense for you.
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