Financial goals have many factors depending on the individual, including age, time horizon, income, short- and long-term targets, etc. For an investor to be successful, it is important to identify specific goals and determine how to achieve them within the desired time frame. Investors must assess spending needs and decide how to allocate their capital while ensuring they have cash reserves available to invest in opportunities as they present themselves.
Preservation of capital
Preserving capital is the first step to achieving financial goals. Capital preservation strategically protects funds and aims to limit losses. This can be accomplished by allocating money to safer investments, like fixed-income securities, CDs, Treasury bills, and cash. Money that is not invested cannot be lost; however, it cannot gain much either and will eventually decrease in value due to inflation.
Current income is cash flow that is generated by consistent, anticipatory revenue streams. Investing for current income looks to take advantage of investments that pay distributions in the short-term, such as dividend, interest, and premium.
Current income also refers to regular deposits such as employment paychecks and proceeds from goods and services. Current income is focused on the immediate proceeds from investments, not the slower growth strategy of long-term strategies.
Capital growth strategies focus on the capital growth provided by owning assets that appreciate over a long time frame. Capital growth is measured by the current value of an investment relative to its price when it was purchased.
Multiple instruments provide investment opportunities for capital growth. Riskier assets, like equities, have the potential to generate larger returns when held for a longer period, but may experience volatile swings in the process.
Capital growth strategies seek to add risk to a portfolio to grow the account value through capital appreciation of securities and have less emphasis on current income.
Speculation is the practice of allocating capital to investments with the hope of substantial gain but at the risk of significant loss. Speculative investments typically offer above-average returns but are generally much more volatile than safer investments.
Investors typically allocate a small portion of their account to speculative instruments, hoping that some investments’ long-term rewards will offset the losses of others.
Education savings accounts are tax-deferred trusts created by the United States government to assist families in funding minors’ education. Families often have a financial goal of saving for a child’s education and utilize tax-advantaged accounts to grow savings over time. Education savings funds can be used to assist families with a variety of expenses involved with education.
Money from an education savings account must be used by the time the eligible recipient is 30 years of age. Otherwise, additional taxes and fees will be imposed when funds are withdrawn.
Retirement is often the primary motivation for financial investing. Investors use different tools to determine the amount of money they will require when they no longer have a steady income from a job.
Proper retirement planning begins early, as compound growth is one of the most beneficial tools for an investor. Throughout the lifetime of a portfolio, investors may choose to alter their strategy while planning for retirement.
For example, younger investors may benefit from riskier, long-term investments, knowing they have more time to withstand volatility and account drawdowns.
Conversely, as investors age, they may choose to invest in safer assets that exhibit less volatility, as their time horizon is greatly reduced, and a substantial drawdown may be difficult to overcome before retirement income is needed.
All investments have tax implications, with multiple factors determining the tax consequences of capital gains, capital losses, dividends, and other distributions. The length of the holding period, amount of gains or losses, and types of instruments invested in all play a role in how an investor will be taxed on their investments.
Investors need to evaluate the impact taxes may have on their investments and adequately plan for the eventual effect taxes will have on their portfolio.