Question

Identify one SMART financial goal. What do you think is the best way to invest to meet that financial goal? Explain why.

Answer 1

SMART financial goals are :

1. Specific
2. Measurable
3. Achievable
4. Realistic
5. Timely

• One SMART financial goal is to build an emergency fund.
• It is specific but let's refine it more. It can be an amount, let's say $100,000
• Now, the time period to achieve it can be 10 years.
• It is realistic since there is a reasonable and roughly accumulation of $10,000 per year. ( actual amount will be different due to the time value of money)
• It is timely (ie. in about 10 years).

How to achieve it?

• The best way to achieve this goal is to calculate the amount required to be invested in an instrument of choice (which can be figured out based upon the risk apetite of a person).
• Assuming that the person investing expects the investment to grow @5%.
• The annual requirement can be calculated using the following formula:

The annual requirement is $12,950.45

• Thus, $12,950.45 can be invested per year in an instrument which grows at the such rate.
• This investment will grow to $100,000 in a span of 10 years to meet the emergency fund requirements.

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