Financial goals are targets which you would like to achieve in the years ahead. Ask yourself this, “Why would you want to put away money for your future ?”. Most of the investors will answer “To make money”.
Making money is every-one’s dream but it is not a goal. If you want to travel to Kerala or to Kashmir, your preparations for both places will be different – you will plan differently depending on where you are going. Ditto for your financial life.
Let’s dive deep and check what this concept means.
How to go about doing goal based investing ?
The first step in setting up your financial goals is to chalk out those occasions in life when you will have to shelve out a large amount of money which your regular income cannot meet. It’s a no brainer that on occasions like marriages, education, international trips and retirement, you will need a lump sum amount of money to spend which your monthly salary will not be able to cater for.
Document these occasions – these are nothing but your financial goals in life. Obviously, when you jot these down, you will note when in your life these occasions are going to occur. Let’s take an example. Suppose you are 35 years old and you have decided to save for your 5 years old child’s marriage.
So your financial goal is saving for your kid’s marriage and the time frame is 20 years (let us assume the marriage age of child as 25).
The next step is to get the current costs of your goal. Ascertain how much would it cost to get your kid married today. Let’s pick a figure of Rs 10,000,00. However, this expense of 10 lakhs is something which is correct if your child were to get married today.
But in reality, your child is going to get married after 20 years and the cost will increase due to a monster called inflation. So, let’s project this current cost to inflation adjusted costs.
Assume inflation rate of 9%. If you were to run these three figures (current cost of 10 lakhs, inflation rate = 9% and time frame = 20 years) through a calculator, the cost of getting your child married 20 years hence would be Rs 56,044,10 !.
Lo and behold, you now know by how much your child is going to make you poorer by, so before you go running to your spouse about not planning for another one, relax. It ain’t so bad as it seems.
Your last step is to ascertain, given a rate of return, how much you need to save per year so that you can get to this goal. Since this is a goal which is very far far away, the best way to achieve it would be investing in equity and for that you could pick a rate of return of 15% per annum as that is what historically equity has returned.
So, if you have 20 years and a goal of 56 lakhs to make with a rate of return of 15%, what would you need to invest each year – that comes to Rs 54,707/- per year and Rs 3,743/- each month. That isn’t bad, is it ? Check out the graphic below to see how you can document goals.
Congratulations for having now understood how to think and plan for your goal. Lastly, you need to pick an investment avenue and start saving for your goals. Let us recap the steps:
Steps involved & examples of goals
- Step 1 – List down all your future financial goals – these are occasions when you need a large sum of money.
- Step 2 – List down the time frame as to when these will occur.
- Step 3 – Document the current expense for these – how much you need to spend if this goal were to happen today.
- Step 4 – Calculate the future value of this goal with an inflation figure.
- Step 5 – Calculate how much you need to save each year/month for this goal. For this you will assume a rate of return which will depend on how far your goal is and which investment method you chose.
- Invest for your goal in a suitable investment class.
It must be noted that goals can be short, medium or long term in nature.
Examples of short-term goals could be :
- Pay off a home loan in another 1 year
- Plan a major birthday bash for your child next year
Examples of medium-term goals could be :
- Buy a car in another 3 years
- Revamp the interiors of your house in 4 years
Examples of long-term goals could be :
- Save for retirement
- Save for child’s education
- Save for child’s marriage
- Plan for an international trip
It is very important to note that the rate of return and where you invest will largely depend on whether your financial goal is short-term, medium-term or long-term in nature. While equity is considered the best way to invest for long term goals, for short-term goals, debt is more desirable while medium-term goals can have a mix of both.
Other points to keep in mind
- While planning for your financial goals, learn to differentiate between must-have and good-to-have goals. Retirement is a must-have goal while an international trip is a good-to-have goal.
- You will need to prioritize your goals so that you can save for the ones you find most important in case you don’t have the capacity to plan for all of them.
- Consider what taxation could do to your money you plan to accumulate.
- Investing for a goal is a professional task so seek the help of your financial planner.