September 29, 2023 7:16 pm
September 29, 2023 7:16 pm

The Importance of Financial Goal Planning: A Tale of Saving and Investing

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Last week, I discovered the importance of having a clear financial goal and a suitable investment strategy. I have a personal budget that includes $500 per month for discretionary spending. This is different from the necessary expenses such as groceries, bills, and family outings that are paid from a joint family account. The discretionary money gives me the freedom to spend on things that I enjoy, such as gardening, cooking, or drinking matcha lattes from Peet’s. I don’t have to use up the whole amount every month, so I chose to put half of it towards extra debt reduction and investing. My investing included contributions of $50-80 every month to a brokerage account, where I had fun selecting stocks and bonds and creating a portfolio. I also earned some sign-up bonuses and after about 18 months of saving and investing, I reached $1550 in my account!

Investing was an interesting and satisfying hobby for me, and I followed the market fluctuations and patterns. However, I neglected to check if my portfolio was appropriate for my purchasing goal. I had a diversified 60/40 portfolio of stocks and bonds, but I also wanted to buy new computer parts for a long time. I had donated my old computer rig to my daughter in April, and since then I had been looking for the best components for a new PC. My portfolio was less volatile than the Nasdaq, but last week it experienced a steep decline of almost 3% in one day due to PayPal and 8×8 stocks plummeting and a general market downturn. By chance, that was the same day that my $50 monthly deposit came in, so I saw it disappear in a few hours. I realized that stock markets can fall by 30% on average during bear markets, and I wondered if I was ready to risk delaying my computer upgrade for another couple of years. After completing my research, I found out that I could build a fantastic PC with the amount I had in my account, so I swiftly moved my money and purchased the parts! I was lucky that I still gained $130 in investment returns over the last 18 months, despite the market being down over the same period.

The $45 loss proved to be a really inexpensive lesson on risk management and portfolio time horizons. Here are a few common techniques that I’ll be using more often in the future!

Giving Purpose and Direction to Your Money

Having well-defined financial goals provides purpose and direction to your money. It helps you understand where your hard-earned dollars should go and what you want to achieve with them. Like in the experience shared above, setting aside discretionary money and dedicating a portion to additional debt paydown and investing provided a sense of control and focus over financial decisions.

Creating a Budget

Effective financial planning involves creating a budget to manage your income and expenses efficiently. A budget acts as a roadmap, allowing you to allocate funds toward your various goals while ensuring that you have enough for your essential expenses. By carefully managing your finances, you can avoid overspending and accumulate funds for your specific aspirations.

Prioritizing Your Goals

Not all financial goals are of equal importance. Some may be short-term, like purchasing new gadgets, while others may be long-term, such as saving for retirement. Prioritizing your goals allows you to allocate resources accordingly. As seen in the experience above, reevaluating investment choices after experiencing a market dip helped to understand the significance of short-term purchasing goals and make necessary adjustments.

Diversification and Risk Management

Investing is a valuable tool for achieving long-term financial goals. However, investing comes with risks, and it’s crucial to diversify your portfolio to mitigate potential losses. In the shared experience, the 60/40 stock and bond portfolio helped reduce volatility but wasn’t entirely aligned with the short-term purchasing goal, leading to a potential loss during a market downturn. By diversifying investments and understanding risk tolerance, you can protect your capital while seeking opportunities for growth.

Monitoring and Adjusting Your Plan

Financial goal planning is not a one-time task. It requires regular monitoring and adjustments as your circumstances change. Life is dynamic, and so are your financial needs. Regularly reviewing your progress toward your goals and reassessing your financial situation will help you stay on track and make necessary alterations to ensure success.

My experience losing a month’s worth of investments shared above highlights the importance of planning out your financial goals. The importance of risk and time horizons is crystal clear when market volatility can wipe out a month’s worth of contributions! By setting clear objectives, creating a budget, prioritizing goals, and managing risks through diversification, you can take control of your financial future. Financial goal planning not only gives purpose and direction to your money but also empowers you to make informed decisions, adjust your course as needed, and navigate through the ups and downs of the financial market. Readers, are there any financial lessons you have learned from past experiences, both positive and negative, that have shaped your current approach to financial planning? Have you ever experienced the challenges of managing discretionary funds without a clear financial goal in mind?

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