Learning to set investment goals is one of the most important things you can do as a new investor because it helps you keep track of where you have been, where you are, and where you are going. The best investment goals typically have three things in common:
Good investment goals are measurable. This means they are clear, concise, and definite. Saying to yourself, “I am going to set a goal of saving £100 per week” is useful because you can evaluate your finances and determine whether you succeeded or not. Either you did, or you did not, save £100 per week. In contrast, saying something like, “I am going to set a goal of saving more money each year” is somewhat useless because it doesn’t hold you accountable.
Good investment goals are reasonable and rational. If you say that you want to reach £1 million in personal net worth by the age of 40, you can use things like the time value of money formula to test whether or not your present rate of saving is sufficient. You aren’t going to get there by putting aside £5,000 a year between the age of 18 and 40 at a historically, reasonably probable rate of return. This means you need to either lower your expectations or increase the amount of money you are putting to work each year.
Good investment goals are compatible with your long-term objectives. Money is a tool that should exist to serve you. Nothing more. Nothing less. The sole purpose of money is to make your life better; to give you the things that allow you to experience more happiness and utility. It doesn’t do you a bit of good to end up with an enormously large balance sheet if it means you have to sacrifice everything of value in your life and end up dying, leaving behind the fruits of your labor. Sometimes, it is better to have a lower savings rate and enjoy the journey more than you otherwise would have. The trick is to make sure you’re wisely balancing your long-term desires and your short-term wants in a way that maximizes joy.
There is no formula for that as only you can determine which trade-offs you are willing to make; which sacrifices pay bigger dividends for you down the road.