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Goal Based Investing – How does it work?

Goal-based investing focuses on investing with the intent of achieving your financial goals. It involves you measuring your investment progress based on how close you are to achieving your goals. Basically, every investment you make is not for returns but for the purpose of achieving a goal. Here’s everything you need to know about Goal-Based Investing.

What is Goal-Based Investing?

Goal Based Investing (GBI) is a type of investment that places your financial goals as the target to attain when investing. The yardstick for measuring Goal-Based Investing differs from conventional investing. With GBI, you only measure how well you are able to reach your goals. However, in Conventional investing, you measure your success based on how well it appreciates in the market.

With GBI, you need to think of every investment you make as having a sole purpose. Some examples of goal based investing include:

  • Saving for your child’s education
  • Keeping money for retirement,
  • Saving to purchase a house

The examples above are life goals because it takes time to achieve them.

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How does Goal Based Investing work?

Basically, GBI permits you to be active when deciding on the type of investment to go for. This is because, for every investment you make, you attach it to achieving a life goal. Therefore, you will need to choose carefully the type of investment suitable for your goal.

With Goal Based Investing, you can also benefit from a tax perspective. You can draft a goal based plan that offers a structure for using tax efficient strategies when choosing where to invest. In simpler terms, this means that a GBI allows you to choose an investment structure that will benefit you.

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What are the factors to consider when planning my Goal Based Investment?

Below are three important factors to consider before planning your Goal Based Investment strategy:

1. Time frame

How long will it take you to reach your investing goals? How much funds will you need to invest to achieve the goal? Every life goal has a different investment approach. You can use a goal based investing calculator to help you out with this. However, you still have to estimate the interest you earn on each investment.

2. When to begin

The best time to start goal based investing is immediately after you set your life goals. The earlier you start, the faster you achieve your goals. Basically, for a life goal like retirement, it is important to start early. This will ensure that you save enough before your retirement age.

3. Inflation

Inflation is the consistent increase in the price of goods and services. During GBI, you need to consider how an increase in price affects your goal. For example, let’s say you want to invest in your child’s education. There is a good chance that tuition fees will increase in the future. So, you need to plan your Goal Based Investing while considering the increase in tuition fees.

Basically, you need to consider the factors above before you start investing.

How can I start Goal Based Investing?

Before you invest, take an unbiased look at your finances. Have you saved enough for emergency funds? Are you in a lot of debt? Are you willing to take the risk that involves investing? Once you are sure your finances are stable, you can begin Goal Based investing. To start, follow the steps below:

Thereafter, research the various types of investment available and how much you need to start. Some examples of investments include Bonds, Stocks, Mutual funds, etc.

Ensure that you carefully choose an investment that is appropriate for your goal. You can seek the advice of an expert to help you with this.

Lastly, work with a financial advisor to help you work towards achieving your goals.

Closing thoughts

Goal Based Investing is simply investing towards achieving your life goals. Basically, it increases your commitment to your life goals. GBI also allows you to actively participate in choosing your investment type. Undoubtedly, this investment approach is one every individual should consider.

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