How Goal Based Investing can help you Build Wealth

Why do you invest money? To grow your money and earn returns, right?

Have you thought about what you will do with the returns?

Investing money can only be effective if it is tied to a specific goal. Otherwise, the money will get squandered in some expense and you won’t have enough left when you really need it.

This is why, practicing goal based investing is the best way to build wealth.

Why do you Invest Money

invest for goals - goal based investingRecently, a friend came up to me and asked for some good investment options.

“Why do you want to invest?” I asked him.

He stared at me blankly. “Because I should invest. That’s the right thing to do” he managed to say.

“Yes, it’s the right thing, but do you have any specific goal for which you want to invest?” I continued.

“No, I just want to get good returns” came the reply.

Most of us start our early investments like this. We don’t have a plan, we don’t have any goals, and we don’t understand the purpose for investing money.

We invest because we want to “make money”, or because it is the “right thing” to do.

“An investor without investment objectives is like a traveler without a destination.” – Ralph Seger

Investing without goals will guarantee that you do not build any wealth. Yes, you may get spectacular returns, but you will most likely use it up in some expense.

When you really need the money, you will realize that you don’t have enough.

To build wealth from your investments, ask yourself the question:

“Why do you invest money?”

If you answer “to make money”, “get returns”, or “it is the right thing to do”, you should change your outlook towards investing, like I did.

How I started my Investment Journey

goal based investmentsWhen I started my first investment, I did it because it was the supposed to be the right thing to do.

I started a monthly SIP in a mutual fund without having any definite plan for my investment.

After investing for a few years, I stopped the SIP and let the money lie in the fund, hoping that it would grow. This was around 2005-2006, and the markets in India were scaling new highs.

My money did grow, but very soon, I redeemed all of it and blew it up in some expenses I thought were important.

Back then, I did not know about goal based investing.

If I had kept the money invested, those few thousands would have become a few lakhs today and could have been part of one of my goals.

Fortunately for me, the question “why do you invest money?” was answered beautifully by this quote:

“You invest money to have the right amount of money at the time of need.” – Unknown

That’s it. That’s all you need to worry about. Having the right amount of money at the time of need. That is the essence of goal based investing.

Why Goal Based Investing is the key to Build Wealth

goal based investing build wealthWhen you start investing based on your goals, you essentially plan for your future big money requirements.

Once your goal based investing plan is in place, you do not have to worry about money when a goal is near.

Want to go on a vacation to Europe or the exotic locales of South America? No problem, the money is ready.

A new car? You have the money.

Early retirement? Your financial independence corpus is ready.

No goal is unachievable if you have properly planned for it.

The best part?

Once you start investing for your goals, you can splurge the rest of your money guilt free in whichever way you want!

The latest smartphone? A weekend road trip? Dinner at a fancy restaurant? Go ahead, your goals are taken care of.

More importantly, while you spend freely on one of your goals, your other goals are not affected as they already have their own corpus in place.

You will never need to worry about money again.

Yes, I agree, it is not easy. You must be very disciplined and invest regularly as per plan. You must be patient.

During the initial years, you might feel it is difficult to achieve your goals. Don’t give up, just put your head down and start investing. The corpus takes time to grow.

Just think how easy your financial life will be once you start accumulating enough money for your goals.

A Step by Step Guide to Goal Based Investing

Goal based investing step by step plan

1. Identify your Financial Goals

The first step towards goal based investing is to identify your financial goals.

List out all that you want to do that requires a good amount of money. Don’t worry if the list looks huge at first. You can modify it later and prioritize the important ones.

Here is an example of a few financial goals. You might have different ones.

  1. Buying a car
  2. Buying a house
  3. Saving for a foreign vacation
  4. Saving for children’s education
  5. Saving for children’s marriage
  6. Saving for retirement

Once you have listed your goals, assign a timeframe to each one and classify them as short, medium or long term goals.

Goals like buying a car and saving for a foreign vacation are short term goals which you would usually like to meet in 1-3 years.

Buying a house can be a medium term goal for which you could wait for 5-10 years.
Children’s education and marriage are long term goals if you start from the time the child is born.

Retirement is of course a long term goal.

2. Calculate how much you need for each Goal

Next, calculate how much money you need for each of your goals.

This is fairly simple for most short term goals like buying a car or saving for a foreign vacation.

For goals like retirement, it is a bit complex. Use online calculators, and be aggressive with your expense estimates. Don’t worry if the amount seems too huge.

Once you have got the right amount of money for each goal, calculate how much you must invest per month to meet the goal. Once again, use online calculators.

For short and medium term goals, assume a return of 6-8%.

For long term goals, assume a return of 8-10%.

The example below shows an initial goal based investing plan for a 30 year old with one newborn child.

Goal Name

Time left to achieve in years

Amount required

Expected returns from investment

Monthly investment required

Buy a car (down payment)

1

200000

6%

16000

Save for foreign vacation

3

500000

6%

12500

Buy a house (down payment)

7

2000000

7%

18000

Child’s education

18

2000000

8%

4000

Retirement

30

50000000

10%

22000

Now, does the total amount you need to invest look huge? So much that you will not have much left for your daily living expenses? If yes, it’s time to prioritize your goals.

3. Prioritize your Goals

Before I tell you how to prioritize your goals, I want to tell you about one investing goal that you should achieve first – creating an emergency fund.

No matter how much we plan, life is uncertain. Emergencies can come anytime. If we are not financially prepared, our savings can be wiped out.

If you don’t have an emergency fund, you will dip into the investments meant for other goals during an emergency. Obviously, your other goals will suffer.

So, before you start investing for any other goal, create an emergency fund first. The amount should be at least six to nine months of your monthly expenses.

After investing for your emergency fund, allocate money to your other goals.

Now let’s look at how to prioritize your goals. We will take the example of the table above.

Goal 1: Buy a car

investing goal buy carEveryone will agree that buying your first car with your own money is a great feeling.

However, you should buy a car only when you have properly planned for it financially.

If you are not able save enough, you can delay this goal by a few years.

If you really need a car, consider buying a second hand car for now. It will be much cheaper and will serve the purpose.

After a few years, you can buy a new car once you have sufficiently saved for it. If you can save upto the entire cost of the car instead of just the down payment, that would be an added advantage.

Goal 2: Save for a foreign vacation

investing goals vacationTravel is a fantastic opportunity to experience a new country, new culture, and meet new people.

It does open our hearts and minds, but only if done the right way.

Will you really enjoy your foreign travel if you have to think of your messy financial situation once you come back?

You don’t need to go for a foreign vacation just because your neighbour, friend, colleague, or relative went for one.

Instead, travel when you have accumulated enough funds. That way, you will be free to enjoy your vacation, without having to worry about money.

So, you can delay this goal by a few years.

Goal 3: Buy a house

investing goal buy houseBuying a house is often an emotional decision than a financial one.

We all feel passionate about buying our first house, don’t we?

However, it’s important to be financially prepared. Buying a house is a very capital intensive purchase. If you don’t plan it right, you will end up paying high EMIs throughout the rest of your earning life.

If you feel that you have other higher priority goals, then you can delay this goal by a few years.

If you don’t want to delay it, then you can prioritize this goal.

Goal 4: Child’s education

investing goals educationYou will need money for your child’s higher education when your child turns 18.

Once your child is born, this goal is non negotiable and a high priority one.

Goal 5: Retirement

investing goals retirementRetirement is one of the biggest financial goals. You are looking at around 20-30 years of life with almost no income and rising medical costs.

When you are starting your career, this goal may look far away. But you need a lot of money to build a good retirement portfolio. You should start investing for your retirement as early as possible.

If you feel you will not be able to invest a big amount now, you can invest a smaller amount and increase it by 10% every year. However, remember that if you invest in this way, you will have to invest a huge amount in your later years to achieve this goal.

Investing for Retirement

Let’s see how the investment works out in the above example. The goal is to have 5 crores in 30 years. We will assume a 10% expected return.

If you invest the same amount every month

You have to invest 22000 per month for 30 years to achieve your goal. Over the 30 years, you would have invested 79,20,000 in total.

If you invest a smaller amount now and increase by 10% every year

You can start with 8000 per month and increase it by 10% every month. By the 30th year you must invest 127000 per month to achieve the goal.

Over 30 years, you would have invested 1,57,91,000 in total.

That’s about double the amount invested to get the same amount of money in the same number of years, with the same percentage of returns!

So the choice is yours. Invest in whichever way you feel comfortable.

4. Allocate Existing Funds to Goals

Now that you have prioritized your goals, check whether you have any existing funds that you can allocate to them.

If you are salaried and contribute towards your PF, you can consider this as part of your investment for retirement.

If you have been earning for a few years before you decided to start goal based investing, you might have some investments that you had made earlier.

Go through them and see where you would want to allocate them.

These 3 options, in order of priority, are the best way to utilize these investments:

  1. Allocate them to your emergency funds if you don’t have one (or don’t have enough)
  2. Allocate them to a high priority goal which seems difficult to achieve with current investments
  3. Allocate them to your retirement corpus

After prioritizing and allocating existing funds, your investment plan would look like this

Goal Name

Time left to achieve in years

Amount required

Expected returns from investment

Existing funds

Monthly investment required

Buy a car (down payment)

3

200000

6%

 

5000

Save for foreign vacation

5

500000

6%

 

7000

Buy a house (down payment)

10

2000000

7%

200000

9000

Child’s education

18

2000000

8%

 

4000

Retirement

30

50000000

10%

800000

(600000 PF 200000 investments)

15000

(7000 from PF, 8000 from take home pay)

5. Choose the right Investment Option based on your Goals

Now that your goal based investing plan is ready, it is time to invest for your goals.

I will show you some investment options based upon the time frame of each goal.

These investment strategy and options are based on my personal preferences. You may choose different ones. If in doubt, consult a financial planner.

Goal 1: Buy a car

Time to achieve: 3 years

Investment strategy: 100% in debt investments

Investment Options: FD, RD, Some Debt Mutual funds (Liquid funds, Ultra Short term funds)

Goal 2: Save for foreign vacation

Time to achieve: 5 years

Investment strategy: 100% in debt investments

Investment Options: FD, RD, Some Debt Mutual funds (Liquid funds, Ultra Short term funds, Short term funds)

Goal 3: Buy a house

Time to achieve: 10 years

Investment strategy: 50-70%% in debt, 30-50% in equity. Gradually shift to debt as goal comes near

Investment Options: Combination of Equity mutual funds (Large cap funds or diversified funds) and debt mutual funds (Ultra Short term funds, Short term funds), OR, Balanced mutual funds

Goal 4: Child’s education

Time to achieve: 18 years

Investment strategy: 50-70% in equity, 30-50% in debt. Gradually shift to debt as goal comes near

Investment Options: Bluechip stocks (keep low exposure), Equity mutual funds (Large cap funds, diversified funds, low exposure to mid or small cap funds), debt mutual funds (Ultra Short term funds, Short term funds)

Goal 5: Retirement

Time to achieve: 30 years

Investment strategy: 60-80% in equity, 20-40% in debt. Gradually shift to debt as goal comes near

Investment Options: Stocks, Equity mutual funds (Large cap funds, diversified funds, low exposure to mid or small cap funds), EPF, PPF

6. Review your Goals and Investments Periodically

As you grow older, your goals may change and new goals may be added depending on your life’s circumstances.

You should review your goals periodically and update them.

You should also review your investments once every year. Check the performance and asset allocation.

If a fund is not performing well, move your investments to another fund. Do this only after a few years of investing, since investments take time to grow.

If your asset allocation gets skewed due to market movements, rebalance your portfolio.

Do this for long term goals where you have investments in both equity and debt.

Time to make your Goal Based Investing Plan

Now that you know how goal based investing can help you build wealth, it is time for you to identify your goals and start investing based on them.

From now on, before you invest any money, ask yourself what is the goal for your investment.

After you start goal based investing, you will slowly become a better investor. You will feel secure about your investment decisions and movements in the markets will not worry you.

Check out this Goal Based Investing series by M. Pattabiraman. It has downloadable excel based calculators that you can use to plan for your goals.

Now, Over to You

Now I’d like to hear from you.

Will you start practicing goal based investing from now on?

Have you identified your goals?

Or do you have some questions?

Do you think goal based investing can help you build wealth?

Are you already investing based on your goals? What are your experiences?

Do let me know in the comments

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