This is in continuation with an earlier article on Moneybasics for Millennials.
What is Goal Based Investing?
Goal based investing is a process where you first identify your goals, quantify them in terms of money and by when do you want to achieve it and investing methodically towards achieving your goal.
Step 1: Identifying your Goals
No one has gotten anywhere worthwhile without a plan. Why are we any different? So pause whatever you are doing for a while and reflect on what is it that you truly want. If you are in a relationship, take your partner into this exercise and reflect on what you both want. Once you have a clear view on what you want, you have won half the battle. While as a human being, I haven’t yet evolved telepathic abilities, most wants get bucketed into the following - Financial Independence, Buying a House, Buying a Car, Going on a Vacation etc
Step 2: Quantifying your goals and setting a timeline
Once you have listed down your goals,
- Start quantifying from a monetary point of view on how much it costs today.
- Research about the past inflation rate for the respective goal you are looking at. So for financials independence you may assume the country’s inflation rate however the inflation rate for real estate may be different. Similarly car prices may be growing at a different pace than the national inflation rate.
- Map out a timeline by when do you want these goals achieved.
Step 3: Identify the appropriate investment strategy for each of the goals
Some goals may be more immediate than others. You may want to go on that dreamy vacation within the year (COVID19 permitting of course!) Financial Independence would be a couple of decades away. The way to invest towards your goals will also be different. The more short term goal like the vacation, would mean we cannot take on the volatility and risk that is associated with the stock market. On the other hand, over a long period of time 7+ years, the stock market has outperformed inflation and fixed deposits/liquid funds. So the investments would appropriately need to reflect the goal amount and timeline to achieve them.
Step 4: Identify the right funds/FDs/etc
This is indeed the final step of the entire process, however most end up rushing into questions like which mutual fund is the best before we identify our goals. But you are not most people, you are more enlightened than the average Joe or average Jai. Work with a FEE-ONLY financial planner to help identify your plan.