Goals, time frames and why you invest
Investing for a vacation in a year isn't the same as for your retirement in 30. Each goal's time frame decides how much risk makes sense.
"I want to invest" isn't a goal; "I want to save $300,000 for a down payment in 5 years" is. Giving each goal a name, an amount and a date helps you decide how much to save, where to invest and how to react when the market falls.
Clear goals: the SMART method
A useful way to define goals is to make them specific (what), measurable (how much), achievable (with your real income), relevant (important to you) and time-bound (when). For example: "save $60,000 for a master's degree in 2 years by putting aside $2,400 a month".
The time frame changes everything
The most important rule: money you'll need soon shouldn't be in investments that can fall a lot. Stocks can drop 30% or more in a bad year and take years to recover. If your goal is 12 months away, there's no time to wait.
| Goal time frame | Examples | What's commonly used |
|---|---|---|
| Under 1 year | Emergency fund, vacation | Short-term, accessible fixed income (short CETES, interest-paying accounts) |
| 1 to 3 years | Car, wedding, graduate school | Mostly fixed income; maybe a small part in other assets |
| 3 to 10 years | Home down payment, a business | A mix of fixed income and stocks, depending on your profile |
| Over 10 years | Retirement, your children's education | More weight in stocks and diversified funds, which tend to grow more in the long run |
How much do I need to save each month?
With the amount, the time frame and a reasonable expected return you can work out the monthly contribution. The longer the time frame, the more work compound interest does and the less you have to put in.
Retirement: the goal people postpone the most
Retirement is usually the biggest and most distant goal, which is why it gets left for later. But it's exactly where time helps most. In Mexico, besides your Afore, there are voluntary contributions and Personal Retirement Plans (PPR) with tax benefits; we cover them in the Investing from Mexico course.
Review your goals once a year
- Did the amount or the date change? Adjust the contribution.
- Is the goal getting close? Start moving that money into something more stable.
- Did you get a raise? Raise your savings too before your spending gets used to it.
Test what you learned
1. You need the money in 10 months for a trip. What makes the most sense?
- Tech stocks
- Short-term, accessible fixed income
- Cryptocurrencies
Show the answer
Short-term, accessible fixed income. In under a year there's no time to recover from a drop.
2. What makes a goal useful for planning?
- Being a general wish
- Having an amount, a date and a contribution
- Being the same as your friends'
Show the answer
Having an amount, a date and a contribution. With an amount and a date you can work out how much to save and where to invest.
3. For the same goal, what happens if you extend the time frame from 10 to 20 years?
- You need to contribute more each month
- You need to contribute less each month
- Nothing changes
Show the answer
You need to contribute less each month. With more years, compound interest does more of the work.
Track your progress in ARCO
With a free account you save the lessons you finish, your streak and your achievements, and answer the question of the day.
Everything in this section is educational: it explains how investing works, it doesn't tell you what to buy.