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Goal Based Investing
| Imagine this: You have planned to accomplish many important things in your life - buying a house, an early retirement, good education for your kids - the list is long. And you have been saving regularly - when you get a bonus, when you get some large cash gift, or whenever you get a chance - and have been hoping that these savings would grow enough to enable you achieve the things you have planned. |
And then, you see an advertisement promising a discount on that LCD TV you had been dying to buy. So, you go ahead and liquidate some of your investments to generate cash for the TV, and promise yourself to invest more to make up for this. You get the LCD TV you always wanted, but your investments suffer an out-of-turn reduction.
Sounds familiar? Replace the LCD TV with a vacation, a car or a laptop, and it could be anyone of us. Haven't most of us sold some of our investments at some point in time to buy something unplanned? That is the problem with haphazard or random investment - like many other things in life - When you don't have goals or targets, it's easy to digress.
This means that a more disciplined, planned approach to investment is needed. You should know what exactly you are saving for, so that if you decide to sell some of your assets, it is easier to find out the direct implication on that target. You can also track the investments against your targets, so that you know precisely where you stand.
This is where Goal Based Investment comes in handy. It makes the task of investment very, very easy - the only thing needed is the discipline to invest regularly. Let me explain it in detail.
Goal Based Investment means saving for specific goals. Following are the steps to be followed (Don't worry - I would explain each step in detail):
This can be best explained using an example. So let's say you are a 27 year old working woman, falling in the highest tax bracket.
Note: In the example, I have used Indian Rupees as the currency. If you are from a country other than India, just replace the currency and amounts with those relevant for you, and that would work - the basic principles of Goal Based Investing remain universally true for everyone!
Click here to download the worksheet for this example.
Step 1: Determine Goals
Although there would be many financially significant events for which you would like to save, for this example, let's say you decide you have only two goals.
| Sr. No. | Goal |
| 1 | Buy an apartment |
| 2 | Buy a car |
Step 2: Determine Current Cost
How much do these goals cost today?
In the area where you intend to purchase your 2 bedroom apartment, it costs around Rs. 30,00,000 today.
The car you are planning to buy costs around Rs. 5,00,000 today.
| Sr. No. | Goal | Cost Now |
| 1 | Buy an apartment | 30,00,000 |
| 2 | Buy a car | 5,00,000 |
Step 3: Determine time frame
Now is the time to decide when you want to achieve these goals.
You decide that you would like to stay in your own apartment when you are 50. This means that you have 23 years to achieve that goal.
You would like to buy the car in about 4 years from now.
| Sr. No. | Goal | Cost Now | Years From Now |
| 1 | Buy an apartment | 30,00,000 | 23 |
| 2 | Buy a car | 5,00,000 | 4 |
(Continued on the next page...)
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- Direct investment in Stocks versus Mutual Funds (MFs)?
- Are ULIPs a costly form of term insurance plus MF investments?
- ULIP v/s Endowment Plan for Life Insurance
- National Savings Certificate (NSC)
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Note: Please treat the opinion expressed here as a broad suggestion. Please consult your financial planner / investment advisor before making any investment decision.
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Comments
Add a new CommentLONG LIVE MAN!!!
I appreciate your efforts ...you are really doing a great social service.
ITS REALLY MOTIVATING!!! WILL FOLLOW AS YOU ADVISED
KARVIWHITE
Aug 29, 2008
For instance, it is not clear what the article aims at. Whether to go and purchase a flat or to save in safe /Volatile investment instruments...
The power of compounding applies to both the real estate as well as equity investments. But the depreciation is also to be cosidered for real estate, especially if it is a flat, and the inflation after 23 years, we can't predict. remember , we were euphorinc about the low inflation in Janualry but now a worried lot. it is cyclic, and how come the 18% ROI is taken here i Do not understand. THere are instances that the property prices rise by 200-500 Percentage over 23 years span but incase of flats, are you willing to purchase a 20 year old flat now? Though it was just 5 lakhs in 1988, now it costs say 20 lakhs. Any suggestions? Fine, You say that it is the amount you have to spend to purchase a new apartment after 23 years. But why you stayed on rent for 23 years? are you investing in equities for 23 years while staying on rent. Have you considered the opportunity loss in case you have gone to purchase a flat 23 years ago? Or have you considered the Opportunity loss for not investing in equities for 23 years? are both these options are equivalent? any othere possibilities??
Then there are many other questions. If at all I get some feedback on the above issues
Aug 29, 2008
B. But if you have invested in a flat 23 years behind, how much you paid your bank, (Read the latest woes of the Floating percentage Loanees), what are you getting for 23 years and after that?
Is A-B is Positive or Negative? Are we looking it as of today or after 23 years?
We want to be happy throughout our lives. Isn't it?
In the article, I am not comparing investment in equities with investment in real estate.
The idea is to be aware of the financial cost of your goals in the future, and actively plan for them.
Here's the essence of the srticle:
1. Define the financial goals that you want to pursue. (Purchasing a house is just an example. It can also be your kid's higher education cost, or a corpus for your retirement).
2. Determine the amount needed for the goal today.
3. Determine the amount needed for the goal in the future, taking the trend inflation amount into consideration (which, as you have correctly pointed out, is prone to errors. But that is the best we can do)
4. Find out what is the rate of return you can achieve (it would be the most through equities if you are investing for the long term. But depending on your comfort level, you can even invest in FDs!)
5. Now that you know the return you can get and your target amount, find out the yearly / monthly amount that you would need to save and invest to achieve your goal.
Dec 26, 2008
Thanks for the encouragement.... Happy investing!
Thanks
Keep going in this Way.
God Bless you
Thanks - I am glad that I am being of help.
You can benefit from compounding whenever you reinvest your interest or earnings instead of using them. This way, you get further interest on the interest earned by you.
It is not necessary to invest in stocks to reap the benefits of compounding. You can invest in any instrument - bank FD, post office MIS, PPF - anything.
The key is to not use your earnings, and invest them instead.
Having said this, the maximum benefit of compounding would occur if the instrument gives a higher return. Therefore, I recommended stocks for long term compounding benefit.
If you are uncomfortable investing in stocks, you can start by investing small amount of money every month in a well performing mutual fund - through a syatematic investment plan (SIP).
For more on this, please read "Systematic Investment Plan (SIP) - A rupee a day, keeps worries away".
Feb 11, 2009
First of all, I like your name. Is this a pseudonym? It's a very powerful name with a very Sanskritic flavour to it. I love Sanskrit names. They are so powerful. It's a shame folks are now naming their kids like Tina, bina, etc.. Anyways, back to the main point. Would you please email me at the id I have provided so I can write to you privately about many questions I have? You come across as a sincere person with a desire to help, and I truly admire that.
Regards
Nagendra
Jun 23, 2009
KUDOS... Your article is too good and very expressive. Even a layman can understand what you want to saY.
You really deserve KUDOS.....CHEERS
Venkee
Jul 20, 2009
Jan 06, 2010
For others who complains about flat/equities appreciatation, i think Mr. author is giving you sense about how to calculate/plan.We may consider inflation not 6-7% but can adjust it for asset appreciation, which may give us very aggressive target.
Mr, author again salute to you.
Feb 15, 2010
I have surfed, several websites which just provides jsut a high level information on Investing.
Each of the article on investing is very interesting and it provides an insight on the investing avenues around us.
Thanks on sharing this knowledge to the people.
Ram A
Mar 04, 2010
I was a naive during my intial days of employment.I always thought can someone explain the terms of financial world.
I have been following this site, although silently, from the last two years and found it of great help. I can now proudly explain or discuss about investing. I felt great after reading this article.You are helping all of us in many ways than few.
I appreciate few people here who complained about the depth in this article.To all those, articles in this site are of fantabulous help for us as we are from IT background. This guy here is helping us invest and reap benefits later.he is helping us individually and helping India indirectly.
Thanks again Raag for your valuable effort in putting all this information.
I have been trapped with two children plans which i took from LIC International and I would like to know if surrendering these policies and invest the money in mutual fund will be helpful.
1st Policy i will finish paying last installment of Rs 12956 in december 10, and i have paid this amount for five years and its maturity will be in 2027 with maturity value of Rs 1457000 including guaranteed bonus. If i surrender now i will get 90% of 40 premiums.
2nd Policy i have paid 28 monthly premiums of Rs 13644 and still balance 32 premiums. I belive to surrender the policy i have to pay minimum 36 premiums and i will get back 90% of 24 premiums only.
Please suggest.
Regards
Sunil
(Follow Me)
