BLOG: How goals can help you get the most from your investments
With a little forward planning, using your goals as a motivation to save and invest for the long term can help you reach your targets.
Goal-based investing forces you to take a long hard look at your finances and understand exactly what you can afford, and how much you want to save towards the things you want in life.
If it’s not as much as you’d like, there will be difficult decisions to make about where to cut back without the addition of credit or other means of borrowing. However this will help you to understand just how much you’re able to save towards your goals, and help you do it in the most efficient way.
Set realistic goals with a timeframe
Having a goal of “I want to save £50,000 for a house deposit by September 2016” is far more specific and attainable than “I’m saving to buy a house”. Setting a specific amount and timeframe for your goal will help you work backwards and see how much you need to save.
It’s the same for retirement planning – think about how much you think you’ll need in retirement and then work backwards to figure out how much you need to save now. There are a variety of pension calculators available online that can help you find out what you’ll need and what you need to start putting away.
At Nutmeg, we found that the average timeframe for someone investing towards a child’s education is around 14 years. If you’re investing towards your retirement your timeframe would ideally be much longer than that.
Remember that the effect of compound returns and interest will work in your favour over the long term; so the earlier you start, the easier it will become.
Use a token of your goal
Learnings from the field of behavioural economics show us that we are better at sticking to our goals when we have a ‘commitment device’. A commitment device can be anything that you use to signify your goals in the real world. It might take the form of a photo or object that drives you to save, or it could be the simple act of communicating your goal to friends and family so that they will ask you about your progress.
Many people use automation such as Direct Debits or standing orders to force them to save a portion of their salary as soon as it comes in. This is just another form of a commitment device.
Split your goals and prioritise
People have many goals in life, and if we split our saving or investing goals up into small pots they are more easily achievable. Rather than viewing your whole portfolio as one pot that is going to provide for every eventuality it’s more effective to split it up according to your personal goals – for example retirement, your children’s education and perhaps a house purchase.
It’s also good practice to set up a separate rainy-day fund so you don’t need to raid your other savings to cover unexpected costs.
Understand your levels of risk
For each of your different goals, you may have a different tolerance to risk. We’ve seen that Nutmeg customers saving towards their retirement or their children’s education generally opt for higher-risk investment portfolios as they are generally investing over a longer period of time and have a certain figure in mind that they would like to achieve.
Those saving for shorter-term goals such as holidays, weddings or house purchases generally take a lower-risk approach to try and avoid market volatility taking a bite out of their savings.
Whatever you’re investing for, crystallising your goals and aspirations for your money is key. The clearer a picture you have of what you want to achieve, the easier it will be to commit to the process of regular saving.
Nick Hungerford is CEO of Nutmeg.
Risk warning: The views and opinions expressed herein are for informational purposes only. They are subject to change without notice, and do not take into account the specific investment objectives, financial situation or individual needs of any particular person.
They are not personal recommendations and should not be regarded as solicitations or offers to buy or sell any of the securities or instruments mentioned. The views are based on public information that Nutmeg considers reliable but does not represent that the information contained herein is accurate or complete.
With investment, your capital is at risk. The price and value of investments and income arising from them may fluctuate and you may get back less than you invest.