The answer to this question seems obvious (to make more money right?) but it’s an important one to ask yourself. In addition, we need to understand HOW to Invest for our specific goals.  This article will help you clarify your reason for investing, then help you decide how to invest.  Let’s begin.

Be Clear on Your Reason

Not everyone has a clear reason for investing their money, but you absolutely should.

Are you investing to possibly purchase a home? For your children’s college fund? Retirement? Or are you trying to be like so many (fake) YouTubers with their Lambos and “stuff.” (Hint, don’t be like those YouTubers.)

No matter what your reason, you need to be clear on what IT is, so you can invest appropriately.

Furthermore, your reason can and will change as you enter different stages of life.

For instance, My Experience went something like this:

1. At an early age I found myself buried under a mountain of debt, and my primary goal was just to get out so I could breathe financially.
2. Once I got out of this crushing debt, I just wanted to build up a financial cushion so I could feel more secure and be able to pay for any surprise expenses without having a panic attack. Note: It was here that I began investing automatically in my employer’s 401k option.
3. As I saved and built my cushion, and began earning more in my profession, I was able to splurge on some nicer “things” and eventually ended up with enough money to purchase a home. Note, I was maxing out my 401k and retirement accounts while building my savings cushion.
4.  After I purchased said home, I wanted to build another cushion to cover my mortgage for a set amount of time in case I ever lost my job.
5. It was only after building this second cushion that I found myself with excess cash to invest. It was only after purchasing my first rental property, that I realized I could actually achieve financial freedom and my investing plan shifted from a long term 401k plan, to a shorter term early retirement plan. And I proceeded to invest accordingly.

That was my experience, yours may be different or similar. But no matter what your position, You must be absolutely clear about “why” you’re investing.

Let me tell you a story to illustrate. I recently had a friend call me and ask if he should borrow from his 401k to invest. “Well what are you going to invest in?” I asked. “I have an opportunity for a real estate deal with an 11% return” was his reply.

“What’s your plan for investing” I inquired.
“What do you mean?” He replied.

And that is how most people would reply. In short, you need a plan to guide your investment decisions, not the other way around. For instance, if you know what your end goal is, you can then decide how to invest.

– Stocks vs Real estate
– Income versus capital gains
– High risk versus low risk
– Wealth Growth versus Wealth Preservation
– Quick return of capital vs Longer time frame

If you don’t have a target and a goal, every deal looks the same, and absent a target amount of capital, the default amount just becomes “more.”

What’s more, If you don’t know what type of investments you are looking for, and what fits your plan, you will be pulled off track by shiny objects that don’t fit with what you are actually trying to accomplish (believe me, I know this from experience.)

Create an Investment Plan

So what does an investment plan actually look like? I’ll use myself as an example.

Early on in my investing journey I made the same mistakes I described above. I knew I wanted financial freedom, but I didn’t have a set goal, and I also didn’t have any deal flow, so I jumped at any opportunity that presented itself, losing a lot of money in the process.

Once I got clear on how much money I needed to replace my income, the plan got easier. Let’s assume I needed $100k in passive income to retire. In that case, assuming an achievable 8% return, I would need $1,250,000 invested to achieve $100k in income. Let’s assume I was starting out with $250,000 to invest that I had saved over several years. (Don’t be frustrated by the dollar amounts, this is just an example.) In short, I would need to 5x my $250k in order to hit my $1.25 million dollar target.

So, in this situation, would an 11% real estate deal be a good investment? Maybe, maybe not, we are still missing one other key ingredient…. Time.

Using a simple compound interest calculator, we can figure out that my $250,000 invested at 11% compounded annually, would take between 15 and 16 years to hit my $1.25 million target.

*Image credit www.nerdwallet.com

This 15 to 16 years may be acceptable to some, but if your timeline is shorter, you might need to find another investment vehicle.

Let’s say you wanted to hit your $1.25 million goal in 5 years. In that case you would need to achieve a 38% annual growth rate compounded for 5 years to hit your goal, as demonstrated in the chart below.

*Image Credit www.nerdwallet.com

This may seem daunting, but this is intended to illustrate a method by which you can set your goals, and then figure out exactly what you need to achieve to hit them. By the way, 38% is absolutely achievable with the right deal.
Another option is to accelerate this process by continually saving money and adding to the amount you are investing along the way. This further compounds your returns and speeds up the process. For instance, let’s assume you can save $1000 per month, we can add this to the “Contribution Frequency” box in the calculator above.

*Image Credit www.nerdwallet.com

As you can see, by adding $1000 per month we not only have to achieve a 35% return to hit our goal.

I suggest you use this tool to plan out your investment path, and then seek out investments that meet your criteria. You may find that simply buying ETFs and holding for 40 years may not fit your plan. You may discover that you need to learn about different asset classes (Real Estate, private placement, etc.) Or, you may find out that your best option would be to start a business and scale that, then sell it or take it public. No matter what you discover, you need to know your numbers FIRST, then let that guide your investment decisions.

I hope you found this article helpful. I’d love to hear your comments, what you think, and where you are on your journey. Reach out if you have any questions. I can also be found on Instagram at @CTWealth.

Kind Regards,
CT