How to Define Your Investment Goals in 5 Ways

Setting financial goals is an essential part of personal financial planning. It helps people know what saving strategies they should use and gives them a way to track progress. Setting different investment goals can require striking a balance between which savings vehicle to use and the time horizon for achieving the goal. The process of assessing how to define your investment goals begins by answering questions about what is important to your life and the time frames involved.

What are investing goals? 

Investment goals are targets for how much money to save and how to invest it to cover a variety of future expenses. It could be saving for a new vehicle purchase or retirement by taking advantage of a 401(k) plan at work, for example, or starting a child’s college fund. Goals are typically set to be achieved within a certain time frame.  

Investing goals are essential for three main reasons:

1. They provide a measurable way to track progress.

   Setting a goal and timeline can help keep a person motivated to save and working toward reaching milestones.

2. They help assess whether there will be enough money for the future.

   Setting, implementing, and tracking investment goals can encourage a person to plan for the financial future by putting money aside so it’s available when it comes time for a significant purchase. 

3. They can help when making investment decisions.

   Financial goals can have an impact on the types of investments chosen and how much to invest in them, depending on risk tolerance and time horizon.  

5 Ways to define your investment goals

When deciding how to define your investment goals, key considerations to keep in mind include:   

1. What do you want to accomplish in your personal life?

Whether someone wants to start a family, purchase a house, or travel to every continent, setting personal life goals can help determine what investment goals are right for each person. For example, someone who wants children may have a long-term goal of saving for their future college tuition costs, so saving in a 529 plan is an investment goal matching that personal goal.

2. What do you want to accomplish in your work life?

Someone planning to start a business might have investment goals such as building a large emergency fund or maxing out retirement accounts while working for an employer that offers matching contributions. 

3. What lifestyle do you envision?

People who dream of frequently traveling during retirement will likely set investment goals to build long-term travel funds. Setting short-term goals of trip savings and long-term goals of saving more for retirement are investment goals to consider. 

4. When do you want to accomplish the goals?

Defining specific goals for three, 10, or more years will help in setting short-, medium-, and long-term goals in life. The time for completion can determine the types of investments suited to reach the goal.  

5. What is your risk tolerance?

Investors may want to determine if they feel comfortable with riskier investments or prefer a more conservative investment approach. Balancing risk tolerance with investment goals may help a person stay on track.

Types of investing goals 

There are different types of investment goals based on the length of time to achieve the goal and values. The time frames for each goal depend on a person’s stage in life. 

Short-term goals

Short-term investment goals usually last three years or less. Keeping money in low-risk investments, such as money market accounts and savings accounts with high-interest rates, can allow money to grow while remaining easily accessible. Examples of short-term goals are saving for a vacation, a new piece of furniture, or house repairs. 

Medium-term goals

Medium- or intermediate-term goals are usually within three to 10 years. The investment strategy for these goals may include a mix of low-and higher-risk investments, depending on the timeline to accomplish these goals. Examples of medium-term goals are saving for the down payment on a house or a new vehicle.   

Long-term goals

Long-term goals typically take more than 10 years to achieve. This investment strategy to reach these  goals include higher-risk investments like stock funds or target-date funds, a mix of stocks, bonds, and other securities, with long windows to invest. Long-term goals include retirement and saving for college tuition starting when the child is born.  

Values-based goals 

Values-based goals are not focused on time frames. Instead, they emphasize causes that align with a person’s values, balanced with the risk and potential return of the investment. For example, there are socially responsible funds that invest in companies that have a good record in what are known as ESG issues: environmental, social, and governance. Ethics, workplace practices, product safety, human rights, community relations, and the rights of indigenous or marginalized communities are also taken into consideration

Investing vs. saving vs. speculating 

A person’s financial plans can include investing, saving, and speculating in an effort to achieve financial goals.

Investing is using money to buy stocks, mutual funds, bonds, and more for a possible return of more money. Returns may come from dividends or selling shares when there is an increase in value. There is also a risk of losing money when there is a decrease in the value of stocks or other securities. Investing may help reach medium- and long-term goals because the longer time period allows for the investment to regain losses from any market downturn.

Saving is depositing money into a savings account, certificate of deposit (CD), or money market account, among other options. Saving keeps money secure for future uses. Money saved can still grow by earning interest. The difference between investing and saving is that returns will likely not be as high with a savings account. For example, the national average return for savings accounts is 0.13% annually versus 12.86% historically for large-company stock mutual funds. Saving is more liquid and less volatile than investing, which may be helpful when the money is needed quickly. 

Speculating is riskier than both investing and saving because it means using money in ways that could result in significant loss or great reward. Investing and speculating can be similar—for example, buying certain kinds of stocks could be considered speculating if they carry much higher risk. Speculating can also involve rapid buying and selling of securities in an effort to time the market hoping to achieve a higher return than with investing.

Goals and risk tolerance—finding the right balance

When deciding how to invest to meet financial goals, investors may want to consider the length of time and amount of risk they are willing to take. There is always a risk when investing since positive returns are not guaranteed. Determining risk tolerance can help in deciding which investments are best suited for each goal.

For example, an investor approaching retirement may have a lower risk tolerance than a 30-year-old beginning to save for retirement. Each person has the same investment goal of retirement savings, but the strategies implemented are likely different in part due to tolerance for risk. 

Finding the right balance with risk means the investor has to decide whether they are comfortable with the possibility of losing invested funds and delaying the goal. The alternative is to invest in lower-risk investments like certificate of deposits and money market funds with less potential for returns. Speaking with a financial advisor can help establish a balance between financial investment goals and risk tolerance.

The bottom line

Investment goals define what a person is saving for, and the time it takes to accomplish that goal. Defining goals can help track progress, maintain motivation, and in making investment decisions. There are different types of investment goals based on time and beliefs. These are short-, medium-, or long-term goals, and value-based. A person’s stage in life, risk tolerance, and time horizon can all influence the setting of investing goals.