Goal-based investing

Goal-based investing is a strategy that aims to help you achieve your financial objectives using a process that involves identifying your financial goals, understanding your risk tolerance, and choosing investments that align with your goals.

Simply put, goal-based investing involves identifying specific financial objectives and creating a plan to achieve them through investments.

When choosing an asset class, it is essential to let the goal you hope to achieve be the driving force towards the investment you choose to make. However, before delving further into goal-based investing, it is important to examine the most dominant money personalities.

Understanding your money personality is the first step towards financial health as it helps you shape your approach to spending, saving, and investing.

Money Personalities

Money personalities affect the way we behave when making financial decisions and how we go about spending, saving and investing. From extensive research, there are four common personalities that are common with the majority of people:

1. The Saver 

Savers are the exact opposite of big spenders. They turn off lights when leaving the room, close the refrigerator door quickly to keep in the cold, shop only when necessary, and rarely make purchases with credit cards. They generally have no debts and may be viewed as cheapskates. Savers are conservative by nature and may not take big risks with their investments.

2. The Spender 

Spenders are categorized with what is called the ‘shiny object syndrome'. Spenders will go out of their way to have the nicest cars, newest gadgets, and brand-name clothing, even if it means they will end up deeply in debt. They are always looking to make a statement and live outside and beyond their means. Spenders are advised to create a budget and stick to it. They are also encouraged to automate and look for alternate sources of income instead of resorting to debt to finance their lifestyle.

3. The Security Seeker 

Security Seekers like to know that their money matters are settled and safe. They are all about low-risk investments, quality purchases, hefty insurance, and secure retirement funds. Security seekers are good planners but tend to miss out on investment opportunities because of their tendency to minimize risk. They are advised to find a balance as calculated risks are often beneficial.

4. The Risk Taker

Risk takers are comfortable with taking risks in their financial decisions. They may invest in high-risk ventures or make big purchases without much consideration for the potential consequences. They typically have a high tolerance for uncertainty and enjoy the thrill of making bold moves with their money. However, this type of person can also be more susceptible to financial losses if their risks do not pay off. Risk takers are advised to take calculated risks and find a balance between low-risk and high-risk ventures. They are also encouraged to take time to think through decisions or consult someone with lower risk levels than themselves.

Now that we have gone through the various money personalities, we are able to fully understand the kind of input that our money personality has in making investment-based decisions, which is very critical.

Hierarchy of investment needs

Abraham Maslow was a psychologist who came up with the theory of human motivation. One of the most popular needs theories is Abraham Maslow's hierarchy of needs theory.

Maslow proposed that motivation is the result of a person's attempt to fulfil five basic needs: physiological, safety, social, esteem, and self-actualization.

According to Maslow, these needs can create internal pressures that can influence a person's behavior. 

As the name of the theory indicates, Maslow believed that these needs exist in a hierarchical order. This progression principle suggests that lower-level needs must be met before higher-level needs.

The deficit principle claims that once a need is satisfied, it is no longer a motivator because an individual will take action only to satisfy unmet needs. According to Maslow, before a person can take action to satisfy a need at any level on this pyramid, the needs below it must already have been satisfied.

As illustrated in the pyramid below, with the same reasoning, it is crucial to build a solid wealth foundation while catering for the basic funds needed to meet physiological and biological needs.

After building a solid wealth foundation, the next are investments tied to wealth accumulation and preservation while meeting belonging needs and esteem needs and ultimately wealth distribution when meeting self-actualization needs.

When it comes to drafting your investment goals, you cannot jump the gun. Just the same way you have to be able to eat before you can shop for a new phone or travel for a vacation, you must be able to meet your basic financial needs before you can invest in a house or towards your retirement.

This involves being able to meet daily financial obligations and even short-term contingencies like the need to subscribe for data, transportation costs, home maintenance, electricity bills, the payment of pressing debts, and more.

In investment terms, if your investment goals are tied to being able to meet physiological, biological, and safety needs, then there is a need to invest in safe investment securities from a simple savings account or just having cash in your wallet. These investment goals should have as little risk as possible.

 You cannot accumulate what you have not laid a foundation for, e.g., you cannot save towards leaving a legacy for your children without laying a foundation of wealth that would allow you to cater for physiological and biological needs like food, shelter, and clothing.

Do not be in a hurry. Do not compare your journey to anyone else's. Make sure that the foundation is strong and that you're moving step by step with progress, patience, and persistence. Invest with purpose in each and attach an investment to a goal. This is where goal–based investing comes in. Without it, you won't have the motivation to push toward investment to grow.

In conclusion, goal-based investing is a highly effective strategy that can help you achieve your financial objectives by aligning your investments with your goals. However, before you can start investing, it is important to understand your money personality and the hierarchy of investment needs.

Knowing your money personality can help you make better investment decisions, while understanding the hierarchy of investment needs enables you to build a solid wealth foundation before investing in higher-level goals.

By investing with purpose, attaching each investment to a specific goal, and staying patient, persistent, and progress-oriented, you can achieve financial success and attain your long-term financial goals.

Robert Ochieng CEO-Abojani Investment- Abojani helps individuals with financial education and investment advisory Twitter@TheAbojani. www.abojani.com