Investments and personal finance. Part II: How to reach your goals

n the first part of this article, we dealt with where free money for investments can come from. Today we will try to answer the question of how to set financial goals and invest money in such a way that it is easy to achieve these goals.

Financial plan

Now that you have free money, it’s time to have a personal financial plan. To do this, you need to translate abstract desires into concrete goals and estimate the amount of money that will be necessary for their realization. The resulting list should be sorted by priority – the more important the goal, the higher its priority.

Next, we evaluate those assets that are already available and that can be sold. For example, an old car can be sold to buy a new one. But this is an obvious example, but unnecessary gadgets and furniture are often forgotten, although you can also get some money from their sale. Here you need to take into account the existing savings, if any.

Finally, estimate the amount you are willing to set aside each month. You should not be upset if it is not enough to achieve all your goals within a reasonable period of time. At first, you can limit yourself to those goals that have the highest priority. Allocate between them the value of assets to be sold and monthly savings. The allocation process will give you a visual indication of how long it will take you to reach your goals at your current savings rate.

As a result, you will have a personalized financial plan for which investments will be formed. This plan can be drawn up on paper, in spreadsheets, in notes on your phone or, if it is simple enough, in the investor’s head. The main thing is that such a plan should be understandable and convenient for the user.

Investing by science. Different tasks – different portfolios

We have already written in detail about how to invest depending on your goals in a special article. Here we will summarize the information into a concise form. Almost all financial goals can be attributed to one of the categories listed below, for which certain classes of financial instruments are suitable.

Financial cushion – the most reliable and liquid instruments, e.g. short OFZs or OFZ-PKs
Short-term savings (up to 1.5-2 years) — short and medium bonds. A small share of low-risk stocks is possible
Long-term savings (over 2 years) — shares and a small share of bonds
Passive income – reliable dividend stocks and medium-term bonds
Pension savings and inheritance — reliable long-term stocks and bonds, including those with inflation protection. For example, OFZ-IN or shares from this list.
Aggressive investments (increased risk for the sake of high profit) – stocks, futures, options, high-yield bonds.
For each goal you can have a separate piggy bank, let’s call it a fund, which can be attributed to one of the above categories and invested in the corresponding financial instruments.

For example, after optimizing your expenses, you see that you can easily set aside 10,000$ every month. Let 5,000$ go to a financial cushion, and 5,000$ go to a vacation, a new smartphone, or another goal that will inspire you. – for a vacation, a new smartphone, or another goal that will inspire you.

In this case, the separation may exist only on paper – physically both funds may well be kept in one account, invested in short, highly reliable liquid bonds. Within the framework of one account it is most convenient to keep records on different funds in percentages. In this case, each fund will account for 50% and investment income will be distributed in accordance with these shares.

When one goal is achieved, monthly contributions can be directed to the next tasks within the personal plan. For example, when the financial cushion has reached the required size, the freed up 5,000$ monthly can be directed to a personal pension fund consisting of quality stocks. Or you can try more aggressive investments so that, if successful, in a few years you will have a full-fledged source of passive income.

It’s even easier

In the first stages, the above categorization may be complicated and redundant. Then you can simplify and categorize piggy banks into just three key categories:

Current capital — capital that is used for current consumption and short-term purposes. It can be invested in short bonds, savings accounts, deposits and protected structured products.

Reserve capital — financial cushion and long-term savings. Part of this money should be placed in OFZ-PK, OFZ-IN or deposits (including foreign currency deposits) for quick access, and another part in long-term reliable instruments, such as shares of large companies.

Investment capital — money that an investor is willing to risk in order to receive an increased return. They do not have a specific intended purpose. They can be used for speculative trades in stocks, high-yield bonds and other financial instruments. As the investment capital grows, some of it can be transferred to a reserve or current account.

You’re going quietly — you’ll be farther along

When you set aside money on a regular basis, there can be a sporting excitement that comes into play — you want the capital to grow even faster. This is a reasonable desire, but it is important not to go to extremes. Typical mistakes: too large contributions and too risky investments.

If the contributions are affordable, but make it necessary to cut back a little on pleasure expenses, they will be a good motivator to increase income. In conditions of a small deficit, entrepreneurs start to energetically search for business growth points, employees are more actively interested in career opportunities and try to improve their competencies.

But too much savings can lead to a lower quality of life, poor health, tensions in relationships with family and other problems. Therefore, it is important to maintain a balance between investing in the future and spending on the present.

At the other extreme — in pursuit of capital growth, there may be a desire to invest more aggressively in order to get high returns. Here it is important to remember that the instruments should be adequate to the goal.

As you gain knowledge and experience in the stock market, you will be able to increase your investment returns naturally. There is only one way to accelerate this process — through education.