One of the first most important steps in financial planning is to set financial goals for your future using goal based investing concepts.
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.
Free Download – Ebook on Goal Planning
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.
Good write up. Nicely put as well. I wonder whether there is a list of all financials goals people should plan for. It coudl serve as a ready reckoner.
@Dhruv, You could get the list yourself from many websites, I don’t think I have seen one comprehensive one anywhere.
Good information. I struggle with all my short term goals as they keep changing. Can you sugegst hoe to manage that ?
@Joshi, Why do they keep changing ? Is it because you have not given a serious thought to them or is it because there are many and you keep re-prioritizing them ?
nicely put. i think another thing to keep in mind is the fact that before these goals re reached, money should be moved to safe places life FDs and all.
@Rajesh, I agree, no doubt, that is a very valid point.
Cool ! Very basic advice on planning which most of the folks do not follow. Keep writing such good stuff.
good article.
I have one question here.
which is, do i need to maintain a portfolio for each goal separately?
If yes, it is very tough to maintain a number of portfolio’s if goals are more.
If no, how do we measure progress of each goal from single investment portfolio?
what is the best solution you can suggest?
@Suresh, Excellent question. And it can come to someone who implements financial planning practically.
Maintain one portfolio for ALL goals – having separate ones for each will be cumbersome, though you can do that as well.
If the sum total of all individual goals is EQUAL to the expected value of the total goals each year, then you do not need to worry even if one goal’s target has underperformed. You can always supplement it with the surplus from another goals – there has to be a surplus as the total value of each goal is equal to the expected value of portfolio.
In practical financial planning, cash flow for each year is calculated and as long as it is equal to expected values each year, it is assumed that all goals are on track. If cashflow for a particular year is less than expected, it means a particular investment (and so one or many goals) have underperformed. The investment is relooked at. Does this help in any way ?
Avoid keeping multiple goal tracking.
Very informative article…Pls let me know if I have a term plan and another insurance (with moneyback) policy,should I buy another child plan to ensure my child’s education( I may need around 10 lakhs after 15 years) or I should instead rely on SIP ?
@Sonali, Sonali, to save for 10 lakhs after 15 years, which is a long term goal, DO NOT go for any child plans (moneyback, endowment or ULIPs).
Take the MF route and you will laugh all the way to the bank.
The child plans are nothing but insurance combined with investment – they are essentially not the right products. Avoid them.
Let me know if you need any guidance.
@TheWealthWisher, I am thinking of a plan from LIC called “Marriage endowment and education annuity”.The agent ensured that if I take 5lakh-16yrs plan ,I would get roughly 8.75lakhs after 16 years.One advantage is on death,all premiums are waived off and I get this SA+Bonus on maturity.This kind of gurantee is not offered in SIP(mutual funds).If my term plan is of 50 lakhs,considering the inflation even 50 lakhs wouldn’t be sufficient to lead a normal life…So don’t you think that child’s educaiton is something which should be insured in any case?This is the reason I am in dilemma,whether to rely on SIP or not?
@Sonali,
We are discussing two things here :
(1) What is the best way to save for child education – the answer is equity diversified MFs and not child plans. I can demonstrate quantitatively to you if you can say how much premium your plan is for.
SIPs are the best way to save money for future goals. They are not meant for insurance.
(2) Insuring child plans – this is again achieved best by taking a term plan.
Give me the following details for the LIC plan please :
————————–
Premium per annum :
Sum Assured :
Policy term :
————————–
You have mentioned you want to save 10 lakhs after 15 years.
Any good equity diversified MF will fetch you that if you save Rs 1477 per month or Rs 18275 per year.
@TheWealthWisher, HI…Thanks a bunch for ur reply…Here are the details of LIC plan u required:
NAme of plan:Marriage endowment/education annuity
Premium per annum:Rs.30952
SA:500000
Term:16years.
Here is some more info.
Bonus rate:45
Maturity ammount as per the above bonus rate:8.72 lakhs
@Sonali, So here is the maths :If you pay Rs 30952 each year for 16 years and get Rs 8.72 lakhs, you are making approx 6.4% per annum with this endowment plan !
That is bad bad bad.
Its true that this offers life cover of Rs 5 lakh as well but lets check the below combination.
Suppose you were to ditch this product and go for a combination of term insurance + MFs.
Now lets us assume that you pay Rs 10k for the term insurance each year. For a 30 year paying term, assuming a current age of 35 yrs, you will be covered for approx Rs 25 lakhs via the term insurance.
The rest of the amount of Rs 30952-10000 = 20952 can be invested in equity MFs. With a return of 15% which good MFs easily achieve these days, you will get Rs 13,42,501 after 16 years.
So if you compare this with the endowment plan you have, you will relaise that you are covered for a larger amount and for more no of years AND your returns from MFs are more than 50% of the endowmnet plan option.
Go for a comnibation of MFs + Term Insurance.
In fact, this can be a classic case study for my next article !!!
Hi
Can you pls explain how you’ve calculated the return of 6.4%?
Oh….I got it!!! So you say that I should not go for any plan which combines insurance and investment right?Do you advice opening two PPF accounts(one in my name and other in my child’s name )and putting in maximum money in it.I already have a term plan(for term of 25 years) and wish to invest Rs12000 per month.How should I split it in different investment avenues(like two ppf accounts+MFs+gold+any good postal scheme etc)so that I minimise the risk of putting all my money in only one form of investment.I am 33 yr old salaried person hence my risk taking ability is low.
@Sonali, Yes – do not combine any plan which is insurance + investment.
2 PPF accounts are good but remmeber that you need to have disposable income to put in both of them.
How much does your term plan cover you for ? Are you sure you do not any more cover via term insurance ?
How you want to split Rs 12k per month among debt (ppf/postal schemes/etc), equity(stocks/MFs), gold is dependant on your current asset allocation and what you future financials goals are, so it cannot be answered straightaway.
This is what is called financial planning !!
Provide me your asset allocation in % terms and I will let you know.
Hi,
I have term plan of Rs5000000 for 25 years term.My age is 33.
following are my long term goals:
FOR RETIREMENT:
Current Expenditure per year:Rs.200000 per year
Duration till retirement:25years
Inflation:9%
As per the inflation planner calculator on your website,
expected yearly expenditure after retirement:Rs.1724616
Corpus required after 25 years=1724616/6%=Rs.28743600…(Assuming 6% returns after retirement).Please correct me if I am wrong.
Daughter’s marriage:
Current expenditure:Rs 400000
After 22 years at 9% inflation rate
Required amount:Rs.2663440
Daughter’s education:
Rs10lakhs after 15 years
Now can you suggest how I can split Rs15000 per month amongst different investment options.
@Sonali, What is your current asset allocation i.e. how much of your networth is in equities and debt ?
With the responsibilities I have,I can’t take high risk.I feel I should be investing only 30% of my income in equities and 70% in some other more safe options.
@Sonali, Put all your money in MFs.
All these are long term goals and you can achieve these with great ease by taking the stock market route through equity diversified mfs.
Your decision to invest 30% in equities is wrong – that is because you think you will lose money.
Rather it’s very safe OVER A LONG PERIOD OF TIME.
I am sure that your current asset allocation is also titled in favour of debt and not equities.
Don’t be so afraid of equities.
@TheWealthWisher, u guessed it right….my current asset allocation is 100% debt…I mean ,i pay house EMI+LIC policy premium+ppf +FDs etc…I usually buy some gold(may be worth Rs.25,000 per year).Not a single penny is going in shares/MFs)….but don’t u feel that putting 100% in MFs would be a big risk for a salaried person like me…don’t u think one should at least utilize the ppf a/c benefits to its fullest?I agree that FDs is not a good option to invest…but PPF is a good option…so I can put Rs.70,000 per year in ppf and invest the rest of the money in MFs.Is this not a good solution?
@Sonali, Yeah, I’d agree with you. Put the 70k in PPF and rest in diversified equity MFs via the systematic investment planning route.
Even if you were to put 100% in MFs for say a year, remember that after a year you asset allocation would be still titled heavily towards debt. So the idea is to move as much money into equity as fast as you can, but not in lumpsum, over a period of time via SIPs of MFs.
Let me know if you need more information. Choose the MFs after doing your homework.
All the best.
i am a service holder. i have 20 yrs of service left. i want to plan for retirement.my monthly take home is rs.60000/-.ihave two home loans emi amounting to rs 23000/-.other than this i have enough insurance policies.i do how want any insurance policy.one house property is rented out for rs13000/-. how should i allocate my fund to plan for retirement as well as earn some profit.should i go for SIP or lumsum investments.should i invest in MF or EQUITY. please suggest.
@srabani, Go for SIP, never for lump sum. NEVER !
For retirement as it is a long way off, take exposure to a good diversified equity mutual fund and invest via SIP. Take exposure to debt products too.
The answer here is just indicative and your planning cannot be simple based on little inputs here as the inputs are not very comprehensive.
My suggestion is to take paid fee based financial planning services for detailed planning.
In 2008 I had started investing Rs 2000 in DSP Blackrock regular-Divident mutual fund-which is ending in june 2011.I have invested Rs 79445.13 and now the value of that is 85819.82.Should i continue with this fund or move on to other fund.I have a long term goal of savings for about 25 more years for my 2 daughters marriage i.e about 1,00,00000.I already have HDFC Top 200 mutual with a SIP of 2000.Kindly suggest MF’s to meet my goal and the SIP amount?should i go with these mutual funds for the next 25 years or change it in the later years.Can I meet my goal with 2 mutual funds.
@nidhi, I am assuming it is DSP Blackrock Top 100. Continue with it and with HDFC Top 200. Both are good for the goals you have mentioned.
If you continue investing 4000 each month, you will have Rs 1.3 crores after 25 years with an assumed rate of return of 15%.
Nice article, I have applied for invest@ease at icici bank with in two or three days that will get ready and I have taken account from fundsindia.com it will take 2 or 3 days to activate my account. Waiting for both the accounts to activate. Once that is done I will start investing, this article gave me nice idea how to proceed with the Mutual fund investment. I will jot down all my financial goals and start investing accordingly. If I got any doubt i will visit again.
Thanks for this article, Suresh
@Suresh, Great stuff. Happy for you. Let us know if you need any help.
My main goal is to invest for my child education now he is 7 years old by that time after 10 years he will complete his intermediate and I am planning for him to go for MBBS doctor. For that I need 1 crore. now it is costing around 25 lakhs fees. I think after 10 years it will be around 1 crore, please suggest me how to proceed at this situation. How much i need to invest. Starting I can invest monthly 1000/- in SIP and later on I will increase that is that possible please suggest am I correct way or not?
Thanks in advance, Suresh
@Suresh,
If today the cost is Rs 25 lakhs, then after 10 yrs it will be Rs 65 lakhs approx @ 10% inflation.
You need to invest Rs 3.2 lakh each year for the next 10 years. Assumed rate of return : 15%.
Good one, very realistic examples.
I have joined my job an year back and plan to save 4-5 lakhs(present value) to buy a car in next 3-4 years . I can invest/save 6-7k per month. Please advise me on planning for it. This is my first shot at saving and your expert suggestions would be very helpful.
Thanks.
Go for balanced mutual funds.
I am working lady. My age is 42 years. My son is 16 years old. My total monthly expenses are 30,000/- I have invested in 9 different mutal funds from 2011. For all mutual funds I have made SIPs. I have these funds in my lists. Three SIPs of monthly 5000/- 1) HDFC balance fund (G) 2) ICICI pru. discovery fund (G) 3) Reliance RSF balance fund (G). Two funds of 3000/- each 1) Birla sun life top 100 (G) 2)L&T India large cap fund (G). 3) HDFC gold fund 3000/- montly SIP. I have stock investment of 8,00,000/- in blue chip comapny till date from 2008. I have following ques.
1) How much money I will need for my son’s higher education in UK?
2) How much money I will need as my retirement corpus?
Can u please explain how did u calculate 54,707 to be the amount to be invested for next 20 yrs assuming returns at 15% per annum to attain the goal of 56lk?. I tried compound interest formula and got some different results.
Hi, very informative article.
I am 28 years old and I am searching for good investment options. I just came to know about peer to peer lending as an emerging platform in India and wanted your views on that.