How to save for your long-term goals

Blocking out the short-term noise isn’t easy at the moment; the volume is cranked up to the max. 

On the economic front, inflation returned to double figures in October, mortgage rates are at their highest level for 14 years, and the UK falling into recession seems imminent. 

The UK’s political situation is equally unsettling. We’re now on our third prime minister in as many months, and the recent emergency mini-Budget tax cuts were swiftly reversed to prevent the economy plunging deeper into turmoil. 

As such, many of you will be concerned about the impact this will be having on your long-term financial goals.  

It’s therefore natural to feel the urge to take immediate action. However, this should largely be avoided.

While global stock markets have had a less than stellar 2022, when investing for the long term, bumps in the road go with the territory.  

The best approach right now is to ensure your long-term goals are clearly set out, and to remain focused on them. Here’s how to go about it: 

1. Don’t slug it out with inflation 

Anyone who picked a fight with inflation at the start of the year will be nursing some bruises right now.

Interest rates are climbing which is great news for savers, but the gap between savings rates and inflation is still substantial. Any money in cash is losing value in real terms. 

As stock markets have had a rough ride throughout 2022, your investments are unlikely to have fared any better. You’ve probably seen your portfolio lose value, let alone beat inflation. 

However, long-term investing is a bit like a boxing match. While you may lose a couple of the rounds during the contest, you typically win lots more.  

This is particularly true when it comes to current inflation – slugging it out over the short term is risky. Just ask bitcoin investors. 

Investing in a well-diversified portfolio of assets such as stocks and shares, bonds, property and gold puts you in the best position to win the key battle with inflation, which is over the next 10 or more years. 

We must accept that during some periods, inflation will manage to land a few blows.

But as long as you execute the right gameplan – which is largely just staying invested - your hand should be raised at the final bell. 

2. Clearly identify your goals 

A financial goal is anything you want to achieve during your life with a monetary value attached to it. 

A few common ones are stopping working at some point, saving for a house, travelling the world, and supporting children through education. 

So, for instance, a couple wishes to buy a house by the year 2027, and calculate they’ll need to save £50,000 for a deposit. They know that jointly saving £10,000 every year will enable them to reach their goal. 

This is just an example - your financial goals will be personal to you. After mapping out what these are, you’ll find out they can be categorised as either short, medium and long term.  

Being clear about your goals and understanding the steps you need to take to reach them will help you retain focus on the long-term picture. 

3. Review your progress regularly 

Once you’ve chosen your long-term investment strategy, the key is sticking with it. However, it’s also important to frequently monitor progress against your goals.  

A good example here is when you’re saving for retirement. As your strategy will likely span several decades, lots of things will change along the way.

If after identifying your investments aren’t performing as well as you hoped, you can make any necessary changes to get you back on track.

This may involve upping your contribution levels, paying in lump sums, or adjusting your asset allocations to increase the level of risk. 

You may also need to rebalance your portfolio as sometimes allocations can drift from their original weightings.

For instance, at the outset you decided that a mix of 75 per cent in stocks and shares, and 25 per cent in bonds provided a suitable level of risk for you.

If over the coming years shares performed poorly and bonds performed well, the percentage split of your portfolio could change to 65/35.

By rebalancing you can restore the weightings back to the level of risk that’s right for you. 

If you’re wondering how often you should review progress against your goals, a common rule of thumb suggests this should take place at least annually, as well as after any significant life changes such as having children, losing a loved one, or receiving a work promotion. 

4. Benefit from compound growth 

Would you rather have a penny that doubles each day for a month or £1 million today? 

You may have seen this question online before. What it serves to illuminate is the power of compound growth. 

To cut to the chase, 1p doubling every day is the right answer. After 30 days it would accumulate to more than £5 million. 

While doubling your investment every day would be great, it clearly isn’t feasible. But what this example shows is that as your money grows, you can earn growth on your growth – if that makes sense? 

Compound interest offers another example of this theory in action, and a more realistic one.

If you invest £100 today at 5 per cent year, in the first year you’ll gain £5 in interest. If this is reinvested every year, by year nine your investment would be worth £162.18. And 5 per cent of this figure is £8.14, more than 60 per cent higher than the interest you received in year one. 

The key takeaway here is the importance of time and patience. The more you save, and the longer you invest, the more you’ll benefit from compound growth. There are measurable benefits to playing the long game.

How advice can help 

If you need help mapping out your long-term goals, then it’s wise to seek professional advice.

Many financial advisers use technology such cashflow modelling tools, which provide a forecast of your financial future, helping you to understand what action you need to take to achieve the things important to you in life.

Click below to match with the right financial expert today.