By Michel Jacquemai – Co-Founder & Chief Investment Officer of meetinvest

Before putting your hard earned money into stocks, you’ll first need to assess your reasons for investing, set financial goals and prepare yourself mentally on the potential risks involved with investing in stocks.

Set Clear Goals

Start by making a list and set clear goals on what you want to achieve before investing your money into the market.

Do you want to invest for your children’s college fund? Your retirement fund? Or perhaps your goal is to buy a car? To buy a house? Or you simply just want to lead a more comfortable life by growing wealth? Etc…

While making your list, you might notice that you want to achieve multiple goals at the same time. It would be productive to prioritize them down from top to bottom so that you are aware of your number 1 goal and start with focusing on achieving that singular target.

Set Financial Targets

Now that you have a clearer purpose for investing, take some time and think about the target financial amount that you’ll need to match your goals.

Ask yourself:

How much money do I need for my child’s college fund?

How much money do I need for my retirement at 65 years’ old?

How much money do I need for the car I want to own?

How much money do I need for the property I want to own?

How much money do I want in my bank account at 50 years old?

Etc…

Answer with:

I would need $28,000 for my child’s college education

I would need $2,000,000 for my retirement

I would need $10,000 more for that dream car

I would need $30,000 for the down payment of my dream property

I want $1,000,000 in my bank account at 50 years’ old

Etc…

The key here is to get specific with target numbers that matches your goals. Utilize free online calculators to get estimates on your goals. To help with your search, here are some online tools that you might consider using:

College Education

Retirement

Property

Access Your Financials

Now that you have a target number in mind that matches your goal, it’s time to access your financial health and understand how much money you have and need to save or set aside for investing in order to achieve your goal.

This process is dependent on your personal financial situation. There are numerous guides and articles online that help you understanding the importance and ways on how to allocate your personal finances.

Here are some personal finance guides to get you started:

Access Your Time Horizon

After you have budgeted your personal finances and know how much money you are ready to invest with, it is time to consider your time horizon – how fast or how long do you have and are prepared to give in order to achieve your goal. Knowing your timeframe will help you when it comes to deciding on the type of stock to buy.

Ask yourself:

How long do I have till my child is in college?

How long do I have till I retire?

When do I want to buy my dream car?

When do I want to buy my property?

Etc…

Answer with:

My child is 10 and will be in college at 18, so I have 8 years

I am now 30 years old and plan to retire at 65, so I have 35 years

I just started working and would like to buy my dream car in 4 years

I just got engaged and want to place a deposit on my first property in 2 years

Etc…

Know Your Numerical Differences and Allocate Risk Accordingly

The key at this stage is to identify the numerical differences between your target amount required to achieve your goal and the amount you currently have for investing. With your time horizon in mind, you could work out a rough idea on how much you would need to make from investing in stocks.

A simplified example:

Your goal is to get a dream car and you’ll need $10,000 more. You have $5000 to invest and you want to get this car in 4 years.

You now know that you will need to make $5000 within the next 4 years. Assuming you could generate a stellar 20% annual return, you could achieve your goal of buying your dream car with $10,000 more.

Time Horizon Balance Annual Return Year 0 5’000 – Year 1 6’000 20% Year 2 7’200 20% Year 3 8’640 20% Year 4 10’368 20%

If you look at the table above, you will observe something exceptional. Your money, in $ terms, grows faster over time! In year 1 the increase is $1’000, in year 2 it is $1’200 and in year 3 it is $1’440.

Albert Einstein called this effect, compounding, a wonder of the world. One of his famous quotes was:

Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.

A glass half empty or half full?

Now ask yourself: How much am I willing to risk in order to achieve the goal of growing $5000 in 4 years?

As stock market fluctuates with rising and falling stock prices, it would be prudent to check with yourself on how much you are prepared to lose in order to gain and hit your goal within 4 years. If so, at what amount or percentages before you call it a day at the markets.

To put simply, if the market goes down next year and you lose $1000 or 20% from your initial sum of $5000. Will you adopt a wait and see approach (there are still 3 years to reach your goal) or simply sell your stocks and recoup your losses?

Take some time today and set a threshold for yourself that you feel most comfortable with and keep that in mind. This is your risk tolerance.

Key Takeaways:

Start by setting clear prioritized goals on what you want to achieve

Find out the financial amount that you’ll need to match your goals

Understand how much money you have and need to save or set aside for investing in order to achieve your goal

Decide on your time horizon to achieve your goal

Work out how much you would need to make from investing in stocks in order to achieve your goal

Assess your risk tolerance and set a threshold for yourself

In Part 2, we’ll diving into a commonly asked question: Why Invest in Stocks?

If you have any questions in the meantime, please leave your comments below. I will respond personally to every curious mind.

And if you’re ahead of the curve and want to get started with our stock screening tool that helps you find stocks to invest in like an expert, you don’t have to wait for the rest of the series to do it; register for free HERE.