Money is fungible, which is a fancy way of saying that once it is earned it can be spent on anything. This can cause problems like money in a checking account intended for a car down-payment or for a child's wedding could easily be spent impulsively on a vacation or a flat screen TV.
So, how does one keep track of what we are saving or investing for?
Behavioral economists suggest using goal-based planning and investing. Goal based planning is the same as “asset-liability management” technique used by institutional investors. Simply put, goal based planning ensures that you have enough money when you plan to spend it in the future.
Remember the three-jar saving technique mom used? One jar for emergencies, one for essentials and one for entertainment. Goal-based investing is a sophisticated version of the same and it makes our financial lives a whole lot better.
For starters, a financial goal has three important aspects: Purpose or why are you saving? For eg, a child's education. Amount or how much would you need? If you intend to send your child abroad to study the amount could be in crores or for India based education could be in lakhs. Time or when will you need the money? If your child is 4 you have ~14 years to create your college corpus.
Once you have listed all your financial goals, a few things happen that help you in focusing and achieving your goals:
Honestly, money in a way is boring! It’s the experiences (vacation, weddings) and things (house, car) it buys that’s exciting!
Goal-based investing helps in visualising what money will buy.
Imagine sitting in the living room of a new apartment, or the new car smell. Visualisation is powerful as it is known to make one happy even prior to purchase. Visualisation and the happiness it brings today increases the odds of success in achieving one’s goals.
Writing down all your financial needs and wants helps you prioritise. Does that 2020 World cup trip sound more exciting or the idea of owning a bigger car? Maybe both are attainable. Create a goal for each and evaluate the investment needed for both. If the funds are insufficient, then prioritise. This exercise protects from heartbreak later. It also helps you differentiate between needs (retirement, education, marriage etc) and wants early on.
Once your goal based financial plan is ready, the first step is to automate the investment process as much as possible. Consider investing every month, by starting a SIP. It will provide discipline and help you put your goal planning on auto-pilot.
Then track your progress. Are you investing enough? Are you on track to reach your goals? Every time you track progress, you recommit yourself to achieve the goal. Further the closer one gets to the goal, higher the resolve to cross the line.
Set and track! Don’t set and forget (like that gym membership...)!
Funny how the brain works, right? Writing and tracking financial goals actually fuels the commitment required to achieve them. So use the power of goal based financial planning and invest for a better future.
Gaurav Rastogi is the CEO of Kuvera.in: a free direct mutual fund investing platform. Gaurav managed a pan-Asia quantitative portfolio for Morgan Stanley before he started Kuvera.