Welcome to the 15-day Become a Better Investor Bootcamp!
Today's lesson is the basis for beginning investors: understanding your why.
Before you get into the mechanics of becoming a better investor, you have to first understand what “better” actually means. You’ll need to understand your why.
Is it solely about making more money?
Or is it about seeing better progress towards goals that you’ve laid out in advance?
To become a better investor, you need to set a metric by which you define how well you’re doing, and the single best way to do that is to better understand your why and goals. Ultimately, you need to break down the reasons why you are investing. You also need to find and compare investment opportunities.
In this article, we’re going to look at the steps needed to understand your why so that you can effectively use this course to become a better investor.
With that, let’s get started!
1. Define Your Goal
The very first question you need to ask yourself is why you want to invest in the first place.
The general answer to “I want more money” might be true, but it’s not helpful. There’s likely an answer beyond that.
Your goal might already be crystal clear to you with little thought, but here are a few examples if you have trouble outlining it:
- You want to build up an emergency fund that helps you sleep better at night in case tragedy strikes.
- You want to save up a downpayment for a new home, maybe even 20% to avoid PMI.
- You want to save enough to pay for your child’s college tuition so they can focus on their studies.
- You want to invest a lump sum of cash to start expanding or growing a business that you’re passionate about.
- You want to save enough to enjoy your retirement without worrying about running out of money.
- You want to become financially independent so that you can design your life and choose how you spend your time.
Do any of these goals resonate with you? This is not a complete list, so let your mind wander. Write all of your financial goals down – this is the best first step to understand your why and become a better investor.
Right now, your goal might seem out of reach. You have a goal in mind, but you have no idea how to amplify it.
Luckily, that’s where these essential next steps come in.
2. Find Out How Much You Need
Once you have chosen one or a few goals to focus on you need to work out how much money you will actually need to achieve it.
When it comes to things like getting out of debt, it’s easy enough to add up everything you owe and watch the numbers fall as you pay it down. However, other goals can be a little bit more difficult to define.
For instance, when it comes to your retirement, you need to figure out when you want to retire, what kind of lifestyle you want to fund, and how long you expect to fund it.
>> There are tools like a FIRE calculator for working out how much it would take you to put together all the money you need to achieve financial independence.
Assign a Number
Put a number to your goal. It might change over time, as the costs of things change or your goals shift, but it’s important to have an endpoint you can aim for.
Here are some examples of how to assign a monetary number to your goal.
- I need to save $10,000 to build up 3-6 months worth of expenses in my emergency fund.
- For a new home around $250,000, I need to save $50,000 for a 20% downpayment.
- I will invest $10,000 in my child’s 529 plan now so that it has 10 years of time in the market.
- I will save $500 a month for six months so that I can start my new business.
- I want to reach financial independence retire early by having $1 million invested.
3. Time Horizon: How Long Do You Have to Invest?
The third step to understanding your why of investing as a beginner is determining how long you have to save and invest for each goal. An eventual goal and a motivation behind it can help light the fire you need to really commit to investing. But it’s important to know how long you plan to be investing towards it, too.
There are short-term goals, long-term goals, and those that fall in the middle. Short-term goals generally are achieved in 12 months or less. Whereas long-term goals take longer than a year to achieve, and could even last decades!
With goals like saving for college or retirement, you might have a certain number of years or months to figure out.
Other goals like starting a business might not be super time-intensive, but it’s wise to still give yourself a timescale to work with.
If anything, it makes sure that you’re not procrastinating when it comes to meeting those goals.
Here are some examples of how to navigate this step in understanding your time horizon.
- I’ll save up enough to reach financial independence in 10 years.
- My emergency fund will be fully-funded in 18 months.
- I’ll have enough to buy a new home in 5 years.
- I want four years’ worth of college tuition saved in 15 years.
However, it’s important to note that this varies for everyone. One person’s short-term goal of paying off debt could be another person’s long-term goal depending on how much they have accrued. Additionally, one person’s savings rate or salary may be larger than another’s.
4. Create an Automated Budgeting and Investing Plan
Once you’ve defined your goals, assigned a number, and figured out how long it will take you, you may wonder how you’re going to come up with the money to make it happen. Figuring out how to budget your money so that your spending aligns with your goals is a crucial part of this process.
After setting a clear spending strategy, you can implement other ways to increase your income, like side hustles, so that you can get to your goal faster.
Investing is all about using a structured plan that allows you to make gradual progress over time. You’re most likely not going to be able to make all the money you need in a single swoop. You need to build up towards your goals incrementally.
There are different ways to structure your progress. The simplest way is to figure out how much you need to save and earn and how much time to do it. You then break that goal up into equal monthly increments that you can put on an automated plan, whether that be through your payroll, bank or investment company of choice.
The other method involves anticipating improvements to your financial situation as time goes on. You might only be saving or earning a small amount the first month, but reinvesting some of the money you make means you might earn significantly more the next month. Smart financial choices can mean that your monthly goals grow alongside your financial progress.
Look at your goals and how much you’re able to raise your savings rate, the amount of money you are investing compared to your income, as time moves on. Motivation and effort in this regard can help you decrease the amount of time to your goal.
5. Pull it All Together: A Case Study
If you’ve made it this far in the lesson, congratulations! You’re doing wonders for your future self just by reading and implementing the steps listed here. At this point, you should have a clear understanding of your why for investing.
>> Helpful Tip – your financial goals should follow the SMART mnemonic. They need to be: Specific, Measurable, Attainable, Relevant and Time-Bound.
To put it all together, we are going to review a case study of Mr. Smith. He has run through this lesson and here are the goals that he has formulated.
Robert Smith is thirty years old and has a wife and two young children. They have a two-income household with average salaries. He is looking to invest in their retirement as well as their children’s’ education. They also would like to move out of their starter home within the next three years. He is ready to make a plan to make their dreams a reality! Goal #1: I will invest $6,000 into my Roth IRA this calendar year. I will do this through automatic investments of $500 per month from my bank account into a stock index fund. Goal #2: I will invest $150 per month into each of my children’s 529 accounts for the next ten years. I will do this through an automatic investment from my bank account into an all-in-one mutual fund. Goal #3: I will set aside $1,200 per month into a money market account for the next 3 years to have enough for a 20% home down payment. We will spend less on our monthly budget and utilize side hustles to help make this happen.
6. Track Your Progress Often
So how do you know if you’re on track to hit your goal?
The answer is simple: Track your progress often.
Since you’ve successfully created goals that are measurable, you already have a metric to track. For instance, if you’re trying to accumulate $500,000 into your 401(k) in 20 years, you can track your yearly progress, or even your quarterly progress.
Make safe and reasonable assumptions about the growth of your money over time.
In the $500,000 example – if you assume a 6.5% annual growth, you need to invest about $1,000 per month in order to meet your goal in 20 years. This has now given you a monthly goal that is trackable, measurable and hopefully realistically attainable.
Here are some other ways that you can track your financial progress towards the goals you have set.
- Have monthly check-ins or money dates with your significant other to celebrate small successes and review places for improvement. This will significantly decrease any money fights since you’ll be on the same page.
- Utilize the best budgeting tools and investment trackers to automate the process for you. They will allow you to spend less time looking so you can start doing instead!
- Look at your quarterly statements issued by the holder of your investments. (ie. Vanguard, Charles Schwab, Fidelity, etc).
- Review investment reports issued by MorningStar.
- Keep track of your progress with visual motivators, like printables. You can track how much you have saved over time.
Just remember, it’s important that you place your focus on time in the market rather than timing the market. The longer your money is invested, the longer compound interest can take to work its magic. Even though you want to track your investing progress and goals often, don’t become overwhelmed or obsessed with it.
It’s acceptable for long term goals to revisit them to reassess your progress, make potential adjustments and ensure you’re on track with where you want to be.
Understand Your Why for Investing Before Moving Forward
Everyone wants to be a better investor, but it takes effort and discipline to set yourself up for success. If you want to reach new heights through investing, follow these steps to define clear financial goals that fit your needs in the present and future.
Once you understand your reason behind investing, you’ll have the motivation and determination to keep moving forward even if your goals feel long-winded.
Best of luck to you as you continue with “How to Become a Better Investor in 15 Days.”
Key Takeaways:
- Define your goals.
- Understand how much you need and how long it will take you.
- Implement additional resources for speeding up your timeline.
- Track your performance and re-evaluate your progress often.
This introduction to the 15-day course on becoming a better investor will serve as the backbone for every lesson you learn over the next two weeks. When you understand your why you will understand the metric by which you measure success. This results in helping you define what success looks like for you and make appropriate financial and life decisions along the way.
>> Tomorrow you’ll dive into investment strategies. You’ll learn about the type of investments that align with the goals we discussed today. Additionally, we’ll cover appropriate investment risk, asset classes, and asset allocation.
Until then, get FIRE’d up!
