Goals Based Investing

Today, I want to cover my current thought process on Goals based Investing and share my current journey and how I am aiming to achieve my goals. Before I delve into the details, it is very important to understand that prior to creating such a plan, one needs to have a clear understanding of the cash flow. In other words, an investor should know the cash flow and mandatory commitments i.e. Budget.  The distribution of the funds across different goals needs to be thought-through carefully and with some planning, one can aim to achieve their goals with discipline and ease.

What are Goals?

Goals by definition is a milestone which one wishes to achieve. The goals in the context of this post define financial goals which any individual would like to achieve. The goals could be different at different stages of life. Each one of us is unique and hence, we will have our own preferences and priorities.

Some examples of Goals include Buying a House, Buying a Vehicle, Foreign Vacation, Children’s Education, Children’s Marriage and finally, the big one, RETIREMENT.

The list is a pretty exhaustive one and will appear daunting when you put them down to paper. However, the first and the foremost critical step is to actually identify the goals, define them and plan for the same. In this post, I will take through an illustration on how one could plan for a Goal and achieve their dreams.

Goals Demystified

In this section, I will try to explain how to plan for a goal. For example, let’s consider that I am planning for my child’s XI and XII education i.e. assuming that my salary would take care of everything till X standard.

Step 01: Define the goal: Goal 1 -XI and XII Education for xxxxxx

Step 02: Find out the current day cost. The easiest way to arrive at this figure is to talk to parents whose kids are in this stage of life. You can easily find them in your place of work or in your extended family or friends. Let’s put a number, say Rs: 400,000 for 2 years combined.

Step 03: Now, comes the most important part i.e. assuming a rate of inflation. Though many popular websites and authors advocate a 7-8% figure, I am personally convinced that this wouldn’t be sufficient. At a bare minimum, one should consider Rate of Inflation as 10%. For all practical considerations below, I shall be working with this number.

Step 04: Next, the other important factor is the assumption on the rate of return. Again, the verdict is out in open with figures ranging from 8% – 15%. Typically, most websites advocate a 12% – 15% as the rate of return for the instrument. Though this is definitely achievable over the long run, I would prefer to consider 10% as the rate of return to match my inflation.

Step 05: Now, let’s choose the instrument of choice for investing. In the previous steps, I am considering a post tax based return. Please don’t do the mistake of considering an instrument without the tax implications. This is extremely critical when you are choosing the instrument . For example, never make the mistake of considering FD for the investments, because of tax implications. Let’s consider that a FD returns 10% (some co-operative banks do give this rate). The real rate of return is 10% * (1 – tax rate). So, if one is in the max. tax bracket, this would work out to be 10% * (1 – 0.309) = 6.91% which is way below the inflation. In other words, your post-tax returns are lagging behind inflation and this is a huge risk, as you will not be able to achieve your goal.

For this post, I am considering Equity based Mutual Funds as the instrument of choice due to it’s tax friendly nature. Currently, Short-Term Capital Gains is taxed at 15% plus additional cess and Long-Term Capital Gains is tax free.

Step 06: Finally, determine the time you have for the goal i.e. Years. I would suggest that consider that you would require your money earlier itself i.e. atleast an year earlier. Say if I have another 5 years to go, I would consider the no. of years for investment as 4 years.

Now that we have our building blocks, let’s get to work. Let the math begin..

Goal 1: XI and XII Education
Current Cost (C): Rs. 400,000
Rate of Inflation (RI): 10%
Years to goal (Y): 5
Inflation Corrected Value (IC) = (C) * power((1+RI), Y) = Rs. 650,000.

Now, let’s plan the SIP required to achieve the goal. Goto SIP Planner in moneycontrol.

Key in the values. Expected Rate of Return as 10% (to match inflation) and Value of my investment after as 5 (years to goal – Y). Now, play around with the investment for the month until the maturity amount is shown to be closer to our desired value. For the example above, the investment comes to Rs. 8500.

Voila !! You have your own plan in place. Find a good diversified mutual fund and start investing !!!

Kids Marriage Planning

One final note on planning for marriages. Initially, I followed this approach to come at my goals’ figure. However, the final figure looked very very daunting and scary. I then decided to split the expenditure into 2 parts.

One part is entirely dedicated to Bullion i.e. decide how much of Gold and Silver you would require. Once this is decided, you can accumulate them over a period of time by buying 999 Silver or 24 Ct Gold Coins. When the marriage comes, you need to just exchange the silver and gold bullion and pay a small difference for making and wastage.

The other part is to determine the cash for the function, gifts, purchases etc and plan according to the aforementioned method.

Happy Investing !!! Stay Healthy !!! Stay Wealthy !!!

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