Earning and saving money is not enough. Saving money at the end of the month is only the basic step to a good financial system.

However if you are saving money into a savings account, inflation will eat away the purchasing power in the future.

This is almost common knowledge and hence you have to invest properly.

The other side of the coin is that investments can be risky, to the point where you can even lose your capital.

The risk and return trade-off is what makes investments interesting and essential at the same time.

There are many investment theory that we will not be able to touch upon in one blog post. The idea of this post is to introduce you to a way of safely investing and growing your money.

In the last few posts, I have established the foundation of personal finances, how to organize your money into goals and then create a sustainable, efficient flow.

Now we can look at the last step of this transformation, which is Financial Growth.

What should you invest in?

If you are like what I was 10 years back, you would be chasing returns.

You would be asking the question constantly

“Where do I invest my money to get the highest return?”

This question is driving the whole financial industry nuts and commission driven salesmen are selling high return dreams (or guaranteed low returns) to unsuspecting investors.

The missing piece in most of those marketing hypes is the Risk.

No one asks what is the downside? Can I lose my entire capital?

What if you lose 50%? Then it will take a gain of 100% to get back to where you started.

This dilemma causes people to invest randomly, without regard to the corresponding risk. Whether it is stock market, cryptocurrency, real estate – no one talks about the risk of losing your money. All the talk you will hear is who has made a killing from the market.

So, let me shift your perspective to investing using the foundation we have built.

Invest with a plan to reduce risk

When you invest without a plan, it is like sailing in the ocean without a destination.

Where do you want to go? Or are you just trying to surf the waves?

Surfing the waves may be good as a play, and you can definitely do that with part of your money. But serious investing is about reaching your financial destination safely.

In the second blog on Financial Plan, I have shown how a financial goal can be structured to know how much to save every month, the final number and how to code it into your financial flow.

Now when you think about reaching this financial goal, you have the following parameters.

• S – Specific. What amount do you need for this goal?
• M – Measurable. What can you measure for progress towards the goal?
• A – Actionable. What consistent action(s) can you take to achieve this goal?
• R – Realistic. Is the goal realistic, given your current income and other constraints?
• T – Timeframe. What is the timeframe to achieve this goal?
• Y – whY. Your why (compelling reason) for achieving this goal.

The Y and T will tell you how much risk you can take for that goal.

If the T is short, there is not much time for compounding or recovering losses.

If the Y is strong and non-negotiable, there is not much risk you can take even with a longer T. For example, your kid’s education fund may need a much conservative approach.

Whereas if you are in the beginning to mid stages of your career, you will probably take a lot more risk with your retirement goal – there are decades to compound and recoup.

When you invest like this for each financial goal, you will automatically throw away the random nature and instead ask each investment opportunity:

Is this investment X suitable for my goal Y?

The Term based investing – how does that fit in?

You will read or hear financial gurus talking about short term, medium term and long term goals and then choosing investments accordingly.

It is a very simple format to decide on the risk and return expectations.

Here is a quick recap if you do not know the rules of thumb.

• For short term money, use cash or money market funds.
• For medium term money, use bonds or fixed maturity products like CD.
• For long term money, use equity (stocks, funds, ETFs) or real estate.

Rest everything is speculation – gold, cryptocurrency, land etc.

So how does this term based investing fit into the financial goals?

The Financial Plan that I presented earlier has the T component.

Additionally, it has the Y component, which may further define the risk.

For example, I may use money market funds or cash for a goal which is very important even though I had the 3-5 years to take a bit of risk. This could be saving up down payment for a home, or college savings fund in next 4 years.

Lastly, one of the problems with pure time based investing is that human emotions come into play anytime there is a havoc in the market.

People pull investments at the wrong time, resulting in real losses. They panic when the market goes down and see their medium term bonds or long term equity values tanking.

The goal based framework comes to rescue in this case. When you work with the T and the Y, and invest accordingly – you will not panic if one of your goals with a low Y has volatility in it’s portfolio. You may simply want to wait out the period and extend the T. Remember, you have already secured the safety of high Y goals.

Conclusion

Investing is a broad topic and has many different aspects – return, risk, tax and liquidity.

This post established the importance of disciplined investing – similar to how you will prepare for a voyage in the rough seas. Your goal is not to play with the mighty waves, but to reach your destination or get your catch (like fishermen) with minimal risk.

In later posts, we will dive into various investment options and how to structure your finances to take advantage of each.

I do this all the time with my clients. Everyone has multiple goals, needs and desires.

The peace of mind and happiness when you plan this way, is the immeasurable part.

I had coached a client who was not able to make an important travel with family, fearing losing a part of his savings that he so wanted to save for his children’s education.

This type of analysis opened his eyes that both goals are possible. Within an hour of finishing our session, he went ahead and bought the tickets.

If you or someone you know need help planning their finances, I can be reached at:

Email – info@startyourfinancesright.com

Money for happiness is my mission.