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:
- Short-term goals which are ≤ 6-months away.
- Medium-term goals which are > 6-months but ≤ 24-months away.
- 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.