In this blog, we will discuss goal planning and goal-based investing – the seventh step of the beginner’s personal finance checklist.
If you are new, you can look at the checklist here and read past blogs here.
Have you figured out the goals you want to achieve in your life? Whether it is higher education, vacation, car, house or kids. We have discussed its importance here. Hope it helps.
Don’t panic if you don’t have any goals in mind right now. There are different ways to live your life, and no one way is the right way. It is okay if you do not know what you want to do in life!
But in the financial world, you need some amount of certainty in life on your goals to plan your investments. Without a goal, it would be hard to commit yourself to invest consistently.
Even though your goals may change in the future, there needs to be a starting point to invest in your goals.
Estimated read time: 3 minutes and 30 seconds
Hint: Investing for and achieving your goals will feel like fuelling at the right stops on your road trip.
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Buckle up, here we go!
What is goal-based investing?
We know you have some financial goals that you want to achieve in the coming years. Investing regularly to achieve the respective financial goal is goal-based investing.
Goal-based investing focuses on achieving life’s goals, like saving for a house and building retirement. It focuses on life goals rather than obtaining a high portfolio return.
For example, you would have heard the age-based thumb rule for asset allocation. If you are 25, you invest 25% of your portfolio in debt and the rest 75% in equity.
But here, individual needs and goals are driving factors for investment decisions rather than risk tolerance or age.
How does goal-based investing work?
Let’s say you plan to buy a house after 10 years. The current price of a similar house is ₹50 lakhs. So assuming an inflation rate of 6%, you would need ₹89.5 lakhs to buy the house at the end of 10 years.
To reach the goal, you need to invest ₹39k every month assuming you would achieve 12% returns on average. Normally, we would say it is achievable. But often, we forget the importance of the safety of our investments when nearing the goal.
You can start investing in 100% equity, as 10 years is a long-term goal. But as soon as you get close to the 8th year, you need to move your investments to safer debt mutual funds.
Because if the equity returns are not good in the last two years, you might have to delay your goal or make some adjustments.
Goal-based investing help you plan when to move your money out, and asset allocation is based on your goal deadline.
Why goal-based investing?
Goal-based investing reduce your impulsive decision-making and overreaction based on market fluctuations. Because your decision is based on your goals and not on short-term returns.
This method increases your commitment to your life goals by allowing you to observe and experience progress.
Remember, we all know that as we grow, our goals might change, and that’s okay. It is essential to acknowledge them from time to time and revise it.
How to find goals?
If you have already found your goals, that’s great! Move on to the next part. Others let us discuss how to find goals.
There are many ways to find your life goals, like following Ikigai or thinking about the end in the mind. You can use any method that you are comfortable with. We have found a free tool that can help you identify your goals – Angstrom.
A simple way is to remove the financial obligation from the mind. Let’s say that money is not a problem, so what are the things you want to do daily that make you happy and give you some purpose?
Do you want to paint all day? Or do you want to travel around the world? Apart from retirement, what do you want to do? Go for abroad education or get married in the next 5 years and have a child. Think about it.
Write these goals down because writing them is more effective than you think.
Segregation of goals:
After writing your goals, you need to think about the time frame of each goal. When do you want to achieve it?
For example, planning to buy a car in the next 5 years is a medium-term goal. And vacation every year will be a short-term goal. Likewise, planning for your retirement is a long-term goal.
- Short-term – Goals that you want to achieve within 3 years
- Medium-term – Goals within 3-5 years
- Long-term – Goals beyond 5 years
Think about it and write them down. Have a bias towards action. Also, remember that the money required and the timeline to achieve your goals depend on your income, investments, and returns.
In the following blog, we discuss investment management – Simple ways to invest and achieve your goals.
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Still Curious?
If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.
Angstrom – Discover your life goals in 20 minutes
Jay Shetty – How to set goals – 3 Questions to ask yourself
Investopedia – Goal-Based Investing
Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.