A lesson on the importance of #goals, not investment advice.
Picking up from last week’s post about the magic of compounding, this week is all about your goals and how that drives how you invest.
Before you go ape shit buying up investments, you need to first pause and do that annoying thing that I’m always suggesting. Yes, you guessed it. Calm the eff down and reflect a little bit. You totally need to know the why so you can figure out the what and how.
What is the money for?
What are you goals with the money you’re investing? Don’t say to grow your money. Be specific. What exactly is the money for? Common answers include, but are not limited to:
- Buying a house
- Creating a Fuck You fund
- Saving for a wedding
- Saving to start a business
- Saving up enough money to play a really fucked up prank on your ex
- Saving to buy some bullshit you probably don’t need
If you don’t know when you plan to use your money, you don’t have all the information you need to make any decisions about your investments.
Here’s an analogy. You’re going on a boss ass road trip with you and the besties. Your destination is the goal (Don’t worry, I know it’s really about the journey, not the destination). The road way you get there depends on where you’re going on.
Your destination = how much you need and when.
The way you get there = how you invest.
When Do You Need The Money?
Investing is balancing risk and time. When you invest your money, you take risk based on when you need your money.
For example, if you need the money tomorrow for rent, you shouldn’t take any risks with it like investing it, gambling it or lending it to someone. If you have enough money, your savings is flush and you don’t need a bunch of your extra cash, you can start to save invest it in riskier investment products.
See how there’s sort of a relationship between risk and time?
Time isn’t the only thing that determines the amount of risk you take. You do.
You + Risk = ?
You have to know how much risk you can actually stomach.
When you invest your money, you risk losing it. The reason why anyone takes the risk is because you can potentially get rewarded with more money. There’s a relationship between risk and potential return. Think about gambling - more risk, more potential gain, but also more potential loss.
You should know how you feel about risk because that’ll determine how you’ll feel and react if you’re in that situation.
Here’s a weird example to help you understand. Let’s analogize and say that risk is deciding to drink alcohol. So drinking alcohol is the risk and the proof is equal to the amount of risk you are taking.
So more risk, higher proof i.e. fire water and Everclear. And lower risk, lower proof, i.e. kombucha or light beers.
Before you start throwing random liquids back, one would hope, that you’d understand what level of turnt you are planning on getting and if you can literally stomach that. Did you prepare for it in advance - did you eat dinner and clear your calendar for the morning after?
Risk is the same deal. You need to understand how you feel about risk before you take the plunge. Otherwise, you’re flying blind and you’re unprepared for what may happen.
Of course, it’s totally possible that a crazy unprecedented anomaly happens, sure. But again, we’re trying to control what we can.