Investing step 1: Know your goals

Investing for short-term and long-term financial goals

Investing is an effective way to build wealth – you invest in a variety of instruments so that it can make even more money. Many beginner investors don’t form strong investing habits simply because their investment habits are not tied to their goals.

Do you save and invest in the right manner? Is there a plan of action that guides your investments?

The length of time you have before you need the money you hope to earn from investing determines what instruments you should invest in. Before you start investing, it's vital to understand and set up these three types of financial goals:

• Short-term financial goals
• Mid-term financial goals
• Long-term financial goals

Simple ways to invest

Short-term goals are your immediate expenses. Although timelines vary, they typically refer to savings that you hope to spend within a year. Good examples include an emergency fund, travel expenses, or minor home improvements. According to data from Trading Economics and The Philippine Statistics Authority, the annual inflation rate in the Philippines averages between 2-3% each year. The amount you save today won’t have the same purchasing power next year. In the case of home improvements, if you can buy a new refrigerator at PHP 15,000 today, you might have to shell out at least PHP 15,300 next year. And that’s just one item crossed off your list. All those increments will add up.

Where do I invest?

To achieve a short-term goal while preserving the purchasing power of your cash, stash your money in a short term fund or time deposit that lets you earn some interest in your money offers at least 2% to 5% yield in a year. Time deposits feature flexible maturity – you can choose from as short as 30 days and 90 days to one year or longer, allowing you to beat the inflation rate with interest earnings generally higher than those from a savings account.

Short term funds and time deposits offer a great deal of security with lower risk than stocks, making them ideal for optimizing short-term returns. With a time deposit account, your money is guaranteed as it is insured by the Philippine Deposit Insurance Corporation (PDIC).

Striking the Balance for Mid-Term Goals

There are many medium-term expenses that you can identify and create personal financial goals around. These include a new car, your wedding, or saving for the college tuition of your child who just started junior high school. The common denominator is that it's meant to be spent on future expenditure and you want to achieve these financial goals in years. The sooner you need the money, the more conservative your investments should be.

Investing for medium-term goals helps you grow the purchasing power of your money while you are growing the total value of that money itself. You're giving your finances the necessary boost it needs so that when it's finally time to spend it, you've optimized the potential of its value.

Which investments should I choose?

There are numerous mid-term investment vehicles you can choose from to reach your goals and you may want to use different instruments. For instance, if you're saving up for the college tuition of your child who has just entered high school, you can choose a UITF bond that invests in bonds from corporations with high credit ratings. Bonds typically mature in five years or less, the ideal timeframe to achieve your medium-term goals.

These kinds of investments give better returns but come with a higher degree of risk than short term funds and time deposits.

Pursuing long-term investments

Long-term financial goals are your big-picture costs. These goals take several years or even decades to reach, so they typically involve more money. Examples include your retirement fund or buying a new house.

You could also invest in equity UITFs that are made up of 100% stocks. This is different from investing directly in the stock market as you'll have fund managers to manage your portfolio.

Contrary to popular belief, setting long-term financial goals is not expensive. You can start with a small amount. For instance, the minimum for equity UITFs is only Php10,000. With a long time horizon, you have a wider range of investment instruments with high yield returns suitable for meeting those goals. Even if your goals are still decades away, it's best to start early as time is going to be your most valuable asset. When you remain invested long term or within the recommended investment horizon, there is a big potential for your money to grow. Moreover, with more time to make your money work for you, you can take on riskier investments such as investing in the stock market.

Investing in Stocks

When you join the stock market in the Philippines and buy stocks of publicly listed corporations, you become a shareholder or part-owner. Buying shares of stocks is more costly than investing in UITFs, but stocks potentially yield the highest earnings, especially if you purchase stocks at low market prices and then sell them later at a higher price.

However, prices in the stock market tend to rapidly rise and fall. If the market price goes down, it will result in paper loss. This is why they're ideal for your long-term goals. With an investment horizon of over 5 years and above, you minimize the risk from dips in the market which might take a long time to recover.

Yes, the stock market is a high-risk investment, but the risk becomes more manageable the longer you invest. If you pick the right companies with good growth potential when creating your long-term financial goals, you will be able to maximize your investment earnings. You won't only be earning passive income in the future, you're on your way to building wealth.

Match your financial goals with the right instrument

Not all investment activities or instruments are created equal. Various instruments are out there – some are more ideal for short-term financial goals, while others can help you earn passive income and build wealth for objectives far in the future. The key to a successful investment is choosing the type of instrument that matches your goals.

Before investing, ask yourself, "When do I want to reach my financial goal?" Your investment is a means to an end. Figure out what that end is, and more importantly, when it is. The length of time you have before you need the money will best determine the type of instrument you should invest in.

To find more essential knowledge for your investing journey, visit the Earnest website or download the Earnest app today. As a revolutionary financial education and investing platform, Earnest makes it easy for you to learn the basics of investing and start growing your funds, whenever and wherever it's convenient for you. The Earnest app is available on Apple App Store and Google Play Store.