Investing Prerequisite #3: Goals and Time Horizon

Photo by: Patrick Smith Photography

This post is step 3 in our Investing Template.

Once you have cleared out all your debt and created an emergency fund, it’s time to think about why you’re investing.  It is impossible to have a strategy without knowing what the strategy is intended to accomplish.  The investment strategy of a 20-something trying to buy a house, a 40-something trying to save for their children’s college, and a 50-something trying to catch up for retirement are very different.

The key component of all these things is this:

How Soon Do You Need The Money

The sooner you need the money, the less risky that segment of your portfolio should be.  Riskier investments typically give better returns over the long haul, but in the short term they can be disastrous.  The when of your strategy will be the single most important question in determining an investment strategy.


Lay out your investing milestones.  Think about all the major life changes you would like to have and write them down.  This can be invaluable in deciding what investments are appropriate for you.  If you are going to need a certain amount of money for a house in 5 years, at which point you also want to have kids, you should be very cautious until you have a comfortable cushion to make those plans happen.  Look for all the major events that are going to affect your investing strategy and note them in a time line.

Be Realistic

When you’re designing your strategy make sure that your goals are realistic.  If you’re 55 and you have nothing saved, retiring in 5 years is probably not a viable option unless you want to move to a much cheaper country.  Similarly, do not be anxious to undertake major investments like a house.  Plan for the long run, and don’t overextend yourself.  You may not be able to retire as soon as you like, but taking gambles in the hope to get there faster can lead you to never getting to retire at all.

Other Considerations

Some other things to factor in your goals include:

Risk Aversion:  Some people are simply averse to risk.  They might want the returns a more risky investment could give them, but aren’t willing to take the additional risk.  There’s nothing wrong with this, and it’s important to realize if you are this kind of person.

Comfort: In addition to being realistic in your goals, you should be realistic in how much of your income you will be able to put toward investments.  At the same time, you need to be realistic about which expenses are necessities and which should be deferred.


This step of strategy building is simply to get a broad idea of your goals.  You need to know how much risk you should be willing to take and how soon you are going to need your money.  You don’t want to commit yourself to a 30-year bond if you’re going to need the money to buy a house in 5 years.   Create your milestone timeline and be diligent in assessing what makes the most sense for you.

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