Wealth creation doesn’t happen by accident. It takes planning and consistent efforts to achieve results. If you don’t set a personal timeline for reaching your target goals, the odds of success drop off significantly.
That’s why I always tell people they need to be specific when setting their income and net worth goals. In fact, I advise them to write out a timeline on a piece of paper. Include targets for 90 days, 6 months, 1 year, 5 years and 10 years.
Now, most people seriously overestimate what they can achieve in the short-term. And they seriously underestimate what they can achieve in the long-term.
So before writing anything down, ask yourself how much of an increase to your net worth would make you happy 10 years from now. What would you like your net worth to be?
Imagine a chart where the vertical line represents your net worth and the horizontal represents time.
If you do nothing, your net worth would remain at zero as the years passed by. But even small wealth generating efforts—done consistently—would raise your cash flow over time. The key is taking consistent actions toward meeting your wealth creation goals.
All wealthy people work with specific targets in mind, so you should, too.
Know Your Timeline
When it comes to saving and investing your money, your timeline is very significant because it will determine which investment vehicles are appropriate for meeting your goals.
The rules aren’t carved in stone. But there are some general guidelines due to the fact that volatility poses a greater threat to people who are investing on a short timeline. You’ll want to keep that in mind as you begin putting your hard-earned money to work for you.
Here’s how it breaks down:
For the most part, short-term goals are those which are less than five years in the future. With a short-term horizon, market fluctuations can really work against you—because if things take a turn for the worse, you’re likely to need your money back before the market has a chance to recover.
To offset this risk, you might want to hold your investment capital in cash or cash-like vehicles. Your options here include a basic savings account, a short-term money market fund, certificates of deposit and other financial instruments.
Medium-term goals are those set five to 10 years in the future. With this kind of timeline, allocating a portion of your earnings to stocks and bonds can help boost your investment’s value.
The upside of this timeline is that it allows for a certain amount of volatility—so you could potentially profit from a sudden upswing. But if you lost value in a sudden downturn, your investment would still have a reasonable amount of time to recapture its value.
As a general rule, balanced mutual funds and ETFs that include a blend of stocks and bonds are effective tools for achieving medium-term wealth building goals.
If you’re planning your long-term goals, you’re looking 10- to 15-years into the future. There’s plenty of time to adjust for volatility here, so stocks generally offer the greatest potential return.
Regardless of which timeline you’re focusing on, there are many investment options you can choose from. Just beware of getting too far off the beaten path because if you don’t know what you’re investing in, you’ll get crushed.
The financial services industry has created tons of investment options that are specifically aimed at limiting risk across different timelines. Target-date funds (for retirement) and college savings plans are two good examples.
Your ultimate goal is wealth creation.
It won’t happen overnight, but if you consistently engage in activities that earn you money, which you can then turn around and consistently save and invest, your wealth will grow.
Eventually, you’ll hit your wealth creation targets. Who knows, you might even exceed your goals by a wide margin.
But it all starts with writing down your goals and giving yourself the clearest picture possible of what you’re trying to achieve.
Having all your financial goals laid out for 90 days, 6 months, 1 year, 5 years and 10 years will tell you at a glance where you need to put your focus right out of the gate. The rest is up to you.