How to Choose the Right Financial Investments to Reach Your Financial Goals — Part #1

by Vinaya HS on August 1, 2008

in Finance

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A key to achieving your financial goals lies in knowing what financial instruments to invest in for a given financial goal. For example: if your goal is to eliminate your car loan within the next twelve-month window, it’s financial suicide to start investing your loan repayment money in equity instruments (stocks, equity-oriented mutual funds, etc.). Similarly, if your goal is to retire within the next ten years, it makes no sense to start hoarding cash in a low-yield savings account.

But this is a mistake that we repeatedly make. I too have done so in the past — investing in the wrong financial instrument for the right financial goal. The end result is obvious frustration for not having achieved your goal. I believe that a good way to match your financial goals and financial instruments for achieving those goals is to classify your goals into definite time periods.

For example, I have begun to classify my financial goals as follows:

  1. Short-term goals which are ≤ 6-months away.
  2. Medium-term goals which are > 6-months but ≤ 24-months away.
  3. Long-term goals which are > 24-months away.

I have also identified a set of financial instruments which fall into each of these three categories. Achieving a financial goal is now simply a matter of disciplined investing in the corresponding financial instrument(s).

Your goals and their classification should of course be realistic. For example, if your goal is to buy your first car within the next 6 months (a short-term goal), by fully paying for it in cash, but you have no savings and you spend more than you earn, there’s no way you’re going to achieve this goal no matter what the financial instrument you choose (apart from getting into debt — yes, I do consider debt to be a financial instrument; a dangerous one though).

Stay tuned for Part #2 where I discuss short-term financial instruments for meeting your short-term goals.




Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

{ 3 comments… read them below or add one }

Anonymous August 3, 2008 at 11:11 AM

Hi Vinaya,
Wow…an very informative blog….
Eagerly waiting for the next part…
This post has been very usefull..
Keep the blogs flowing…
Regards,
Girish

Vinaya HS August 4, 2008 at 3:55 PM

It’s coming up soon. :-)

Sree August 5, 2008 at 11:25 AM

Nice blog – keep it going!

“I have also identified a set of financial instruments which fall into each of these three categories.”

Like other readers, i am also waiting for more info on these financial instruments. In addition, it will help if the tax implications of such instruments are also published.

Another query on Mutual funds. Given a specific MF, how to identify the tax implication of the same?

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