Financial planning and money management begin with setting goals. Long term financial goals, financial independence and retirement planning are some of the reasons put down to save and invest.
However, it’s not always necessary to save or invest with a specific goal in mind. If you don’t have a defined goal, you can save just for the sake of saving and invest those savings just for the sake of earning returns. It is critical to understand the advantage that a high savings rate can give you and the risk of the subsequent investment plan you undertake.
When you don’t have a goal
If you are just starting out with your earning journey or if you have been on it for a while but without the responsibility of any dependents, articulating a precise goal towards which you are saving can become a needless drag.
It’s simple to define children’s education as a goal if you have children; its simple to define international travel as a goal if you aren’t already in a job that requires constant travel around the world.
The common assumption is that everyone must have a future financial goal, however, it’s just as reasonable to assume you may not have defined that goal for yourself as yet. Don’t let an undefined goal take away the benefit of starting your savings journey early in life. Uncertainty is a part of life and saving a portion of what you earn will have benefits which accrue in future.
Without a defined goal, the time frame for investments can be long and hence, your ability to invest in growth assets is also higher. Keep in mind though, risk has to be measured; do not take on undue risk, rather focus on building long term wealth through high quality and efficient return options without worrying about short term capital safety.
This applies very well in the early years of your earning life.
When you have surplus
You could also be on the other end of the spectrum. Let’s assume, you started saving early and made good investments, earned better than expected salary or had better than expected profits through your business.
The result being that yours and your family’s future financial needs are well-taken care of, much before time. As your earning journey continues and your work efforts continue to generate a monetary surplus, you are in a better position to invest these towards the goal of maximizing growth.
The investment could be in the form of small stakes in other businesses or large contribution to managed funds in the equity markets. Whatever your choice of investment, it’s not unreasonable to assume that the goal is purely "returns". With a secure financial future, you may even be willing to take on a bit of extra risk in such investments knowing well that your capital may suffer.
Both these approaches to incremental investments are just as reasonable as well-structured investments through goal planning. In both cases, there are no defined goals that need to be fulfilled. It is only in such limited situations that you should seek to build return maximizing investment portfolios; investment horizon can get stretched in time to absorb volatility risk or you have enough buffer through existing wealth to absorb high risk which accompanies high return.