How to use investing to achieve your financial goals - ValueSpeaks (2024)

This entry is part [part not set] of 4 in the series Investing series

A lot of us have different approaches to how we manage our finances. Sometimes this is an offshoot of our personality. It is possible that we are doing a lot of great things without being methodical about them. This might be the case with a lot of people who invest. A few shares and funds here and there or maybe we have just parked our cash in the bank. A clear investment goal tied to a financial goal is a great thing to do.

An investment goal is one of the 7 things you need to do before you start investing. If you are already investing and don’t have clear investment goals, that’s absolutely no problem. Sometimes we don’t realise how much of a method we have to our madness. I often preach goals and plans from a viewpoint of intentionality. It is good to take some time to think about having a clear link between your financial goals and your investment goals. in other words, you give your investment portfolio a purpose.

Why are you investing?

Before I go into how to get organised, it’s good to understand why you are investing or why you want to invest in the first place? You see, people invest for many reasons. I can think of a few:

• You heard it was a great thing to do: Some people were gifted shares by their parents and told it was important. It’s hard to articulate why, but it is.
• Investing is trending: In the past few weeks, trading the market became a trending topic because of the GameStop saga. Some people made a lot of money and it’s becoming impossible not to dive in.

Don’t get me wrong, these are not entirely bad reasons to get into investing. It’s some awareness isn’t it? Investing is important for many reasons and everyone should be doing it.

Here are some reasons why investing is important:

Build wealth

You cannot become a millionaire simply by saving. Technically you can but it will take ages if you are the average person. The power of compounding and a higher than average return on investment compared to savings rates means that you can increase your wealth at a faster pace.

Compound Interest

Remember the principle of compound interest from my previous post? You can leverage compound interest through stock market investments to meet your financial goals quicker. This is because if you invest for the long term, the income, and growth on your investments also generate more returns.

Passive income

You can earn a passive income when you buy shares in companies or funds that pay dividends regularly. The value of dividend income will depend on the dividend yield and amount that you have invested. For example, a £50,000 investment with a 4% dividend yield will give you an annual income of £2000 and a monthly income of £166.7. Dividend investing isn’t for everyone as there are other investment strategies. For example, growth and value investing. Dividend investing is suited to people who want to build an investment portfolio in order to draw income from it to fund retirement or earn additional income.

To beat inflation

With interest rates at an all-time low, keeping excess cash in a savings account now carries a risk. Inflation occurs when the prices of goods are higher in the future. When inflation occurs, the same amount of money today will buy fewer goods/services in the future. To retain the value of your savings, the interest rate earned needs to be the same as the inflation rate or higher. The stock market has historically provided returns higher than money market or savings rates. However, the higher return received from stock market investments carries a risk of capital loss.

So how do you align your investment goals?

Set financial goals

The first place to start is to decide on your financial goals. This is one of my steps to creating a budget. Examples of financial goals can include paying household bills, saving into an emergency fund, paying off debts, saving for a child/children’s education, saving for retirement, saving a house deposit, saving to buy a car, paying off a mortgage, and so on.

Determine the duration of your investment goal

Divide your goals into short-term and long-term. Household bills, paying off debt, and saving for a car are all short-term goals. On the other hand, saving for retirement and your children’s university education are long-term goals unless you are close to retiring or your children are close to going to college. A long-term horizon minimises risk in investing therefore your long-term financial goals should be tied to your investment goals. The earlier you start chipping away at those long-term goals the less you need to put away due to the power of compounding and the easier it will be overall.

Allocate funds in your budget

I have put together a budget ebook explaining the budgeting process and the importance of financial goals and a budget strategy. We often focus on the short-term goals and immediate needs in our budget. Your budget needs to be your planning tool to achieve your financial goals. Ensuring that you are assigning funds in your budget to your investments is important. This can be a percentage of your income or savings depending on your chosen budget strategy. List all the goals that you want to achieve by investing in your budget and allocate funds to them. You should also allocate a purpose/goal to existing investments and check that they are suitable for the set goal.

One of my financial goals is to become financially independent. I have been doing little towards this and priortising other goals. Lately, I have started investing regularly on a monthly basis. It’s not big amounts, but I hope to increase our monthly contributions with time. Workplace and State pensions can only be accessed at a certain age. The pension age to access state pension in the UK is set to increase to 68 for anyone born after 6th April 1978. Working till 68 is not something I aspire to so I have started to prioritise working on investing for the purpose of achieving financial independence.

It is okay to work toward several goals simultaneously. I allocate funds into several accounts serving different purposes at the same time. It is worth considering whether to cut down on non-essentials in your budget to achieve your goals quicker. A regular investment of £250 monthly over 20 years at an assumed return of 5% will be worth £102k. This includes £60k contributions and £42k of investment growth. Cutting some expenditure and increasing the investment amount from £250 to £500 doubles your investment to £204k. So checking your budget for leaks and funds that can be diverted towards an investment goal can get you to the finishing line quicker. I posted the below picture on my Instagram account last week. Seems a bit harsh but true:

Choose an investment strategy, platform and product

Once you have determined your investment goal and how much to invest based on your budget, you need to decide on a strategy then choose the investments and a platform. My blog post on how to conquer the fear of the stock market is good to get started. Here are a few additional things to consider:

• Tax planning – It is important to consider tax when choosing investment products. A tax wrapper like an Individual Savings Account allows you to save and invest up to £20k tax-free in the UK.
• Consider liquid and low-risk investments for short-medium term goals
• Cost- High investment fees can erode gains on your investment so pay attention to these.
• Consider regular investing – One benefit of investing regularly is something called dollar average investing. Investing regularly every month means that your cost will be averaged by the ups and downs of stock market prices. It also means that you can start taking baby steps towards those long-term goals if you don’t have a lot of disposable cash.

Schedule regular reviews

Once you have decided on a goal, determined the investment horizon, allocated funds, and invested through your chosen platform and vehicle, remember to review from time to time. An active portfolio will require regular checks, even a passive one should be monitored regularly. If you want to get started on your goals, I have a pdf template that you can download below.

As always drop a comment below to let me know what you think. Feel free to drop me an email to ask any questions you have. Have a valuable week!