Factors to Consider When Setting Your Investment Goals

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Factors to Consider When Setting Your Investment Goals

There are many factors to consider before setting your investment goals. First, you will need to evaluate your current financial status. To get the best estimate of your status, you can calculate your net worth—that is, your total assets minus your total liabilities. Assets include items such as cash in the bank or credit union, investments, and possessions such as your car, house, household furnishings, and other real property. Liabilities are any debts that you owe, such as credit card debts, auto loans, and mortgages.

Limitations

You will also need to identify anything that limits your ability to invest. Limitations can be anything from outstanding debts to a shortage of available cash.

Risk

Every type of investment has some risk, including the loss of principal. However, investors historically have been rewarded for taking market risk. You will need to think hard about your risk tolerance. If you have a high tolerance for risk, you may be able to take more market risk to get potentially higher returns.

Time horizon

How much time do you have to meet your investment goals? This is called your time horizon. The longer you have to invest to achieve a goal, the more likely you are to achieve it. Identify the amount of time you can keep your money invested without withdrawing it. The volatility of an investment is generally lower over a long period than a short one. A longer time horizon also allows for the opportunity of greater results from compounding returns.

Available money

Lastly, you need to know how much money you can afford to invest. Can you cut back a little on your spending each month? What is the minimum amount of money you need to live on? Remember, the more you save now, the more you should have later.