There’s a good chance that you’ve adopted your money mindset from those who raised you. Whether you are aware of it or not, money psychology plays a significant role, which has helped shape your financial worldview. Now entering the best years of your financial life, investing decisions are crucial for victorious outcomes.
As part of developing Financial EQ, you can achieve life dreams through goal-based investing. Part of GBI is never making emotional investing decisions. By following the principles of goal-based investing, you can link your financial goals to your life goals.
Are your life goals realistic when lined up with your personal financial situation? Prism Planning Partners uses GBI strategies to enable your success.
What Is GBI?
Much like financial art with you as the subject, it’s easy to comprehend goal-based investing (GBI) if you can see investing and saving differently to obtain specific objectives. If you want to save for a down payment on a house, for instance, you could save a certain amount in savings accounts or certificates of deposit (CDs) over the short term.
This helps you achieve a specific, measurable goal: down payment lump sums.
But if you’re saving for retirement in 15 years, you’re likely using different strategies. You may want to save in tax-advantaged accounts such as 401(k)s or Individual Retirement Accounts (IRAs) and allocate the assets to balance price appreciation and safety from volatility.
In other words, for each goal, there is an appropriate investment strategy.
Essentially, GBI focuses more on the individual and their goals than older methods of investing. Some older ways, for instance, focus only on saving specific amounts for retirement, rather than looking at the person’s goals: when they want to retire, what they wish to do in retirement, and how they will get there financially.
Other methods focus on the financial advisor's performance, asking whether their recommendations in the stock picks beat the market or whether their recommendations in other investments were as safe from risk as to the averages.
These methods have their place. But ultimately, knowing whether a given set of portfolio strategies outperformed the market is not that helpful to individuals. In evaluating success, investors usually want to see if they met their goals.
People are more interested in whether they can buy a house or if they can retire when desired. A financial advisor in Libertyville, IL, that provides comprehensive financial planning is the best place for investors like this to begin for wealth management, retirement planning, or investment portfolios.
How GBI Works
Goal-based investing works in tandem with investment choices, time frames in which you want to accomplish your goals, and multiple other factors, such as tax strategies and risk tolerance.
Investment choices and time frames are inextricably linked. Say you want to purchase a second home, and one of your financial goals is saving up for a down payment. You would like to buy this within three years.
Three years is a short-term goal. Because of that, the ideal investment vehicle is cash: savings or CDs. These do not currently feature high-interest rates, so your money will not appreciate significantly. But cash instruments are very safe; you run virtually no risk of the amount of your money decreasing.
Let’s pretend another of your goals is retiring 15 years from now. That’s a long-term goal. You and your financial advisor may well decide that a combination of stocks, bonds, and cash is a prudent asset allocation.
Why? Because stocks appreciate far more than either bonds or cash — an average of 10% annually for 100 years, even once all the bear markets of the last century are factored in. The potential stock price appreciation maximizes your retirement savings.
Stocks also carry greater risk than bonds or cash. Stocks are volatile when the latter two asset classes fluctuate minimally (bonds) or not at all (cash). You can lose money on stocks over a given period, so plan for market volatility. That’s what makes them inadvisable for purely short-term goals: if you make stocks the basis of your three-year down payment savings goal, you could end up getting caught in a bear market and unable to purchase the home.
For investments over the long term, stocks have many advantages. The ebb and flow of bear and bull markets mean that if stocks decline periodically early in the time, they will likely have made up the decline and more by the end. It’s often prudent to turn to more stable investments as retirement comes closer.
GBI can make it easier to save for your goals because realizing them is concrete and tangible, rather than being abstract. You aren’t just saving for a rainy day; you’re saving for a house and comfortable retirement.
The GBI method can make it easier to withstand any volatility in your investments. If the stock market plunges and you want to save a certain amount, the decrease could lead you to panic sell — which effectively removes any chance of making money back in the short term.
Knowing your goal and time frame makes it easier to navigate, adjust, and remain accountable to your plan, customized with your financial planner.
How to Begin GBI Investing
So how does one begin GBI investing with a financial advisor?
First, it’s prudent to review your current financial needs. Many advisors recommend three to six months’ salary as a cushion for emergencies.
Second, review your goals. Consider the following categories:
- Current cash flow (income versus expenses) for the month
Do you want to change anything?
- Investments
Do you need to augment anything or cut back?
Are your investments linked to any goals, needs, or wants?
- Retirement
When do you plan to retire?
What do you plan to do?
What income should you be aiming at during your retirement years?
- Educational savings
Do you, your children, or your grandchildren plan to attend higher education?
Will you contribute to the expenses if so?
How, and how much?
- Risk management
Are all your assets insured?
- Estate plan
Do you have a will or trust?
If not, what is your time frame for getting one?
What assets do you plan to bequeath, and to whom?
Are you ready to discuss your life goals with a GBI financial advisor? Prism Planning Partners will help align your wealth with your dreams!
A Word About Tax Strategies
Although optimizing your taxes may not be an explicit goal, it’s generally understood to benefit your wealth. Many goals can yield tax savings and optimization, especially retirement savings, educational savings, and estate planning.
Investment management support is at your fingertips. Contact a comprehensive financial advisor to discuss aligning your goals and assets through goal-based investing. There has never been a better time to create a financial plan in your favor!
