7 Steps you can take to unlock your financial goals
There are lots of ways people choose to invest, and every investor will have circumstances that are unique. Fundamentally, investing is about balancing risk and reward, and there are actions you can take today to help unlock your financial goals.
For example, choosing an appropriate Investment Portfolio and regular investing over time in an ISA or Pension is a way that investors may try to grow their money towards a financial goal.
Consider these 7 steps towards unlocking your financial goals.
Stay focused on visualising your goal
The most important step of any investment journey is to just get started. And the earlier you start, the better, as it is time in the markets that allows an investment to build up through growth and compound growth. Large lump sums invested later in life may be less effective than little and often investing from a younger age.
The foundation for any investment is your goal. What is it you are investing towards? By setting a goal, and visualising the outcome, you are more likely to stay committed to disciplined investing towards closing your gap to goal over a long-term period.
For example, a Pension, you know you want to retire by 65 with a Pension pot large enough to fund a comfortable thirty-year retirement. By investing for decades in an investment Portfolio, you can envision how you may be able to build that pot over the long term.
Stay disciplined towards your goal, use it as the motivation for investing over the long term.
Be ready for the unexpected with an emergency fund
One of the most important aspects of investing is to ensure your affordability to invest. By investing disposable income you are only investing what you can afford to lose.
You should consider also build up an emergency fund of around three month’s of salary before starting to invest. This can help you to achieve your investment goals as you’ll have peace of mind knowing that you have a source of money to cover any unexpected events.
What you don’t want to be doing is dipping into your investments to cover surprise costs. Taking money out of your investment can be detrimental to growth and compound growth.
With a Pension you can’t withdraw your investment until age 55 (due to increase to age 57 in 2028). In a True Potential Stocks & Shares ISA, this is a flexible ISA, meaning you can withdraw at any time and invest back into your ISA in the same tax year without it counting towards your £20,000 allowance. You may get back less than you invest if you withdraw, as it is only when you withdraw that losses or gains are crystallised. Not all ISAs are flexible ISAs, only flexible ISAs offer the opportunity to withdraw and put back into the investment without it counting towards the allowance.
Invest at an appropriate level of risk
Unlocking your financial goals could involve taking a suitability assessment to help decide upon an appropriate investment. Deciding upon this may involve a financial adviser asking you a series of questions, or an online assessment with your investment provider.
An assessment of your risk appetite helps you to determine what investment may be suitable and what may be appropriate to your needs on a defensive to aggressive scale. This assessment is per an investment and not per a person.
A factor in investing at the appropriate level of risk may be your investment goal. For example, in a Pension, your goal may be retirement. As you near retirement a defensive Portfolio may be less equity based, which may mean market volatility has a reduced impact. However, this isn’t guaranteed, and as a defensive position is more about maintaining wealth it may mean you achieve less growth than what may have been possible in a long term aggressive Portfolio. With reduced risk comes reduced chance of returns. A younger investor may typically be better suited to an aggressive Portfolio, as there may be more equity exposure, which could mean long term growth opportunities, but also greater risk.
A risk assessment will help to place you on the scale of being invested on a defensive to aggressive scale, and every person will have different circumstances. Whatever level or risk you are invested at you need to remember that investments can go down as well as up and past performance isn’t a guide to future performance.
Little and often long-term investing
One of the most common ways people choose to unlock their financial goals is through little and often investing. This can be effective over a long term period, taking time in the markets to potentially benefit from growth and compound growth.
Little and often investing could involve setting up a monthly direct debit into your investment, ensuring you stay committed towards continually closing your gap to goal. Some people choose to set this direct debit up at the start of a month, a concept known as ‘Paying yourself first’ as ultimately that money may return to you with growth in the future.
By automating your investment, it may also be easier to be less distracted by market volatility, realising that no matter what is happening in markets you are still investing regularly with the aim of closing your gap to goal.
Track your progress
Unlocking your financial goals will involve tracking your investment occasionally to ensure you are making progress. You can track your investment performance and see how your gap to goal is closing, which could be a motivating factor towards staying disciplined to the long term aspiration.
However, tracking your progress too much may not be a good idea, as short term fluctuations may cause unnecessary alarm. Remember, an investment is for the medium to long term, so what happens in a day, week, month, even a year, must be viewed in the context of a potentially decades long investment. Markets will go up and down, losses or gains are only crystallised when you withdraw.
An advantage of regularly tracking your investment is you may want to top up when you have extra disposable income available, potentially giving you a view to how you could reach your goal sooner or with a bigger pot at the end of your journey.
Tax efficiency and using tax allowances
As part of investing, you can benefit from tax efficiency and tax allowances.
With your Pension, tax relief can typically be claimed on up to 100% of your earnings or £60,000 in the 2023/24 tax year, whichever is lower.
By using up your allowance as early as possible in the tax year, or using up as much of the allowance as you can afford, you are doing more with your money through tax efficiency. In a Workplace Pension your employer will be a contributing too, meaning your investment benefits from your contribution, your employer contribution, and tax relief from the government.
Just like your Pension, your ISA is also a tax efficient way to do more with your money. You have an allowance of £20,000 in the 2023/24 tax year. With an ISA, you won’t pay any Income or Capital Gains Tax on the returns your ISA generates or the increase in value.
Speak to a financial adviser
There are further financial issues relating to tax efficiency and allowances that you should consider, and given the complexities you may want to consider speaking with a financial adviser.
Particularly if you are approaching retirement, or estate planning, you will be making decisions around large sums of money, and a professional expert is going to be able to inform of you the latest tax implications and how you could be tax efficient.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax is subject to an individual’s personal circumstances, and tax rules can change at any time. This blog is not personal financial advice.