I recently presented at a forum for young investors. The purpose was to help them understand the fundamentals of building wealth.

These types of forums are great because they give you exposure to different perspectives. This is important because there’s no ‘right’ way to invest—there is only what is right for you. Each presenter spoke about the approaches that have brought them the most success. I spoke about my goals-based approach, and there were others that had structures built around the types of assets you acquire and at what time.

Reflexively people advocate for strategies that have worked for them in the belief that others will find similar success. One of the presenters pointed out that most of his wealth came from 1 or 2 stocks. He advocated for young investors to use this approach.

It is difficult when you have experienced such success with one type of asset to leave that church. Just look at the commentary around residential property ownership and investment with many of us Aussies.

Everybody wants to maximise their wealth. Everyone wants to have as much money as possible. If it were that easy, we would all be doing it successfully. Yet for many people the pursuit of wealth maximisation doesn’t work.

I am no different than the other presenters—I experience success with my strategy and advocate for individuals to use it. The difference with my approach is that it is agnostic to investment style, type of investment and asset classes. A goals-based approach focuses on the satisfying the rate of return you need to reach your own personal financial goal. It’s centred around you, and for the outcomes you want to achieve. It gives you a goal and the information needed to come up with a plan to accomplish that goal.

I believe that investments are a means to an end. I believe in maximising outcomes instead of maximising wealth. What does this mean? It means focusing on what works for you and building a plan around that. It means starting with properly defined financial goals.

The issue with many young investors however, is that they don’t have a financial goal. Or at least they think that they don’t. They would rather invest in shares to maximise wealth because they don’t think any alternative is possible.

Most young people are struggling with cost of living, exorbitant house prices, student loans, and low wage growth. For a 25-year-old who is putting away $150 a month, getting a deposit together for a property is a laughable exercise. Retirement is secondary when they’re not able to live a comfortable life now.

This isn’t just theoretical. Countless friends have approached me and said that it’s difficult for them to base their portfolios around their goals because they don’t have any. They think that it is not only impossible but also not sensible to save for property. They can afford their hobbies as it currently stands. They invest in the market to maintain the purchasing power of their money and to grow their wealth.

Mark received a question from a podcast listener that echoed these sentiments. He has written a great article on what to do if you don’t have a goal, and don’t know what you’re saving or investing for. My take out from the article is that life and circumstances change, and it is likely there will come a day where you are firm on what you want. You’ll have a head start if you start investing now.

However, sometimes it helps to reflect properly and understand what you want. This exercise may surprise you—you may come out of it understanding what you want and the goals that you want to achieve.

The exercise starts with taking a deep dive into each aspect of your life, and understanding where you want to be. That isn’t to say that over your life this won’t change. We all change, and we will inevitably want different things. The likelihood is though that these intrinsic goals around what makes you happy may slightly adjust, but they are unlikely to change overnight (although, this does happen!).

I recently read a book called ‘The Virgin Millionaire’ by Ben Nash, a financial adviser. There were a few questions that helps prompt his clients on goals—they are what you want for yourself, what’s important for you, what’s important for your family and where you want to live. I’ve added a few more aspects to consider on this list.

What you want for yourself

These goals are about personal fulfillment and the type of life you want to live. The issue with these goals is they’re often influenced by what society tells you you should be doing and achieving. These goals are independent of that. Some questions that you can ask yourself:

What do you like to do that gives you a sense of fulfillment?

For me, it is travel. For others, it is hobbies that they may have that require ongoing funding over the long term. It could be flexibility to plan the day a certain way, or a sense of stability. I’ve costed out a travel goal and run through an example of how to turn a hobby into a financial goal here. Think about what makes you happy day to day and whether it needs an ongoing or future financial commitment that you should plan for.

Financial independence

No one wants to be financially dependent on another person, a job or the government. Financial independence is an ever-evolving concept where each milestone sets another one in front of you. This is okay. Just as we continue to grow as people over our lives we can grow financially as well. Each new step you take builds the foundation for financial independence.

Understanding what financial independence means to you could be a great goal to start with.
When I finished university, financial independence was an aspiration even if my initial goals seem modest upon reflection. It was to be able to pay rent and all my associated living costs.

Since then, I have married and have achieved growth in my career. Now, it means being able to independently support myself regardless of any unforeseen future circumstances. This means that I have my own bank account, control of my pay checks and my finances structured in a way where I can spend money in a way that suits me.

Shaped by my experiences and circumstances, the independence from an employer is not a qualifier for my financial independence. I have provisioned in my emergency fund for 4 months of unemployment, but I expect to be employed again within that timeframe.
I know in the future, like in the past, my understanding of financial independence will evolve. As I approach retirement, my definition will encompass independence from employers supplying my paycheck.

What’s important to you

Your money philosophy relates to the lens through which you view money. This is often shaped by your own personal experiences and your relationship with your finances. Understand what gives you peace of mind with your money and what aligns with your values. These goals could be philanthropic, it could relate to educations the, or even just a standard of living that you want to maintain. Have a think about what these activities would cost for you to maintain.

For example, if it’s important for you to ensure that you continue to be a lifelong learner. If you’d like to continue further education and receive formal qualifications. You can cost that and work towards it.

Where you want to live or work

Where you want to live or work is important, and it constitutes a main financial goal for many of us. The obvious question to ask here is whether purchasing a home is feasible, and if it is not, what is? This could tie back to your goals with financial independence. Reasonable goals would be to have enough savings to cover a 5% rent increase, so it won’t impact your quality of life. Or—being able to build a passive income stream that allows you to live closer to work or afford to live on the coast. Not all financial goals have to be mammoth, multi-decade achievements. Find ones that will make your life better and align with what makes you happy.

What do you want for yourself and your family?

Depending on your family dynamics, you could want to plan for your children’s education costs, or for your parents’ care costs later in life. It could be both. I’ve written about how to think about these costs in this article. Both of these can be significant expenses and if they are pre-emptive financial goals, can be managed better to take the pressure off. This can be a great goal for not just giving you peace of mind, but also helping with cashflow in the future so you’re able to continue funding or investing for other goals that you’re yet to figure out.

How do you like spending your time?

Although a lot of us can’t afford to retire at 40, even saving for a goal to retire 1 or 2 years early can give you something to look forward to and improve your quality of life. If you have enough runway and you’re consistent with your saving, this is an achievable goal. Take for example, the savings needed to save $1,000,000 by the time you’re 65. This graphic illustrates the capital outlay required at different ages. Most of us will need a lot less than that to fund a slightly earlier retirement if we start earlier.

1 million by 65

That is of course, if you’re someone that can’t wait to retire. You may decide that you want to work for yourself, or want to drop down to four days a week to spend more time on hobbies. Find a goal that you can cost and work towards.

Improving and maintaining your health

As you get older, the likelihood of getting a chronic illness is high. Your goal may be to save towards being a bit more comfortable during this time, as the financial costs do spike with specialist visits and other healthcare costs. I speak a little about health outcomes and how they are different for women in this article, but it applies to both men and women.

Your goal may also be to build in a buffer to afford fitness or mental health resources, and not have to go without if or when you need to access these resources.

Your legacy and impact

Is there a specific legacy that you want to leave? Whether that is for family members or for causes that you care about, these financial goals can make many people feel fulfilled and also have no minimum cost. Whether large or small, legacies can leave a meaningful impact as it is left with intention.

Open up choices for the future

This article was intended to raise questions. That is what gaining an understanding of your goals is—it is reflecting inward and understanding what you want your life to look like and how you can achieve it with the financial resources that you have.

If this article has helped with clarifying what your goals might be, follow it up with some research from our behavioural science team about digging deeper for those goals. It will help you properly define them and what you actually want to achieve.

Mark’s article says it best—if you still can’t figure out what you want to save for, start investing for a future goal you might have. Ensure that your funds are at least maintaining their purchasing power. This doesn’t mean take speculative bets and trying to find those one or two stocks that are going to change your life. Many investors have done exceedingly well by just getting the market return without trying to beat it. Taking this approach may help avoid poor behaviour and trying to become the next Warren Buffett.

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Previous Future Focus columns:

  • A better way to use financial advisers' favourite investment strategy
  • Why I use managed funds
  • Why I don't hold cash
  • Why I won't commit to an SMSF
  • Read this before you pick an ETF
  • Every Aussie deserves a fair go with super

Resources mentioned:

  • Mark to market: What if you don't have a goal? Mark answers a reader question about goal setting.

  • Morningstar's Guide to Portfolio Construction

  • Do you know why you are investing? New research from our Behavioural Insights team suggests that many investors should clarify what drives their investment decisions.

  • Are you part of the sandwich generation? Prevent financial stress when caring responsibilities arise from children and parents. 

  • Travel more with a better alternative to savings. Passive income can be harnessed to reward your future self.

  • Mark to Market: Do you have a goal? Mark answers a reader question about goal setting.