"If you do not know where you want to be, you would not know how to get there."
Goal based financial planning, why should we go for it?
How are we investing?
How are we saving and investing our money? Is there an action plan that guides our investment? Or are we just putting our hard earned money into different instruments, on the advice of some friend or colleague, or on the basis of the market performance, without considering why we are putting in the money for? Most people invest into products as and when they become hot topic, ie. gold is going high, let’s buy it. real estate will always appreciate, let’s buy it. This makes our investment portfolio like a complex web of financial products hoarded without any thought.
Worse, most people don’t even track their investments regularly or restructure or rebalance their portfolio accordingly. Don’t we require a more disciplined, planned approach to investment?
Why Planning is important?
Planning is the key to successfully achieve what you set out to do, whether it is game, leisure, life or investing. Even activities like Birthday party, going on a trip become simpler with planning. Of course, there are things that you simply cannot plan for. But our financial future should definitely not be one of them.
As Benjamin Franklin said:
“If you fail to plan, you are planning to fail!”
What to Plan in Finance?
When we talk about financial planning, what exactly does it mean? Its not about setting aside how much money every month. Or buying a car or a house? Putting aside money for children’s education or retirement funds?
It means identifying our financial goals,choosing the time horizon for achieving each one of them, and choosing how to reach those goals. Then It means making an roadmap so that we can reach our financial goals. It is easier to work towards specific, achievable financial goals rather than saving towards a vague goal of a ‘comfortable’ or ‘secured’ future.
Goal setting is more than just scribbling down some ideas on a piece of paper.
Goals can be:
- Increasing income/Reducing expenses
- Clearing credit card debt
- Loan Repayment
- Funding higher education
- Buying Car/Bike
- Funding travel/holiday/function
- Buying dream home
- Starting business
- Getting married
- Becoming a parent
- Children education
- Children’s marriage
- Secure old age
Goals are not wishes or dreams!
All of us have an endless wishlist of dreams. However, given our limited resources, it is difficult to provide equally for all our wishes. We have to understand the difference between our needs and wants.
Goals should be realistic and attainable. For instance, a Rolls Royce worth several crore of rupees may be our object of desire, but with a salary of Rs 6-8 lacs per annum, it may not be a feasible idea
Goals should have timeline. Some goals can be met within a short span of time, such as buying a car or going on a vacation . Some can only be achieved over years of saving and investing, such as funding children’s education or marriage, or early retirement.
Setting goals is not a one-time exercise. With time, changes will occur that affect our lifestyle, the way we think, what we consider important, the state of our health etc. These changes, in turn, affect our goals in life. As goals are achieved new ones need to be set up.
Goals are fundamental to achieving financial peace of mind, especially goals that are SMART.
- Specific ex: I want to buy a bike within a year rather than I want to own some vehicle some day.
- Measurable ex: I want to keep aside Rs 1000 every month instead of wanting to save a lot of money.
- Attainable ex: If my net earning is Rs 10,000 a month then saving Rs 1000 a month is an achieving and energizing goal then a Rs 100 or Rs 8000 saving a month.
- Realistic ex: If my net earning is Rs 10,000 a month then saving Rs 1,00,000 a year is not realistic.
- Timely ex: I want to save Rs 15,000 by the end of this year (specifically).
What is the Goal setting process?
Goal Based Investment means saving for specific goals. Following are the steps to be followed :
- Think of major events in your life which would have a significant financial implication, and for which you would like to save.
- Find out the cost of achieving these goals today.
- Determine how far away these goals are from today (in years).
- Determine the cost of achieving these goals at the target time using an approximate but conservative rate of inflation.
- Determine the after-tax rate of return you can achieve when you invest today.
- Arrive at the per-year and per-month investment necessary for each goal.
- Choose the investments that would take us closer to our goals.
- Start investing as per the plan today, specifically for these goals!
Why Goal based investing?
It connects with our goals : When investments are linked to our goals, it makes us focused towards our dream. The concept of goal-based investment stresses on having a planned and disciplined approach to save money for our life goals. By having a plan defined around our goals, we can allocate our money to the right asset class, so that we are readily available to meet the big expenses of life. Our dreams, our wishes become achievable.
It prevents us from digressing: We have planned to accomplish many important goals in our life – buying a house, good education for kids , early retirement. Suppose now we get some extra money, bonus, refund or cash gift. And we see an advertisement promising a discount on a Smart TV which our neighbour has bought. So we go and buy the TV and promise ourselves to invest next time. We get the TV which was not our goal. But if we have goals we know how using this extra push, we can get closer to our goals. When we don’t have goals or targets, it’s easy to digress.
Don't get carried away: For example, we may face a situation where a FD scheme with bank is offering better returns than a diversified equity portfolio over the last one year. Should we sell our equity investments and transfer money into FD? Or the gold price has come down should we buy more? or should we remember that these products have different role to play in our overall portfolio and are not comparable. With goals one is mentally prepared to deal with volatility so that abrupt decisions based on prevailing market conditions can be controlled. We know what we are doing and why we are doing so we relook at the situation, understand how it affects and make conscious decisions.
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