Goal-based investing makes it more likely for an investor to reach their financial goals. Writing and tracking financial goals actually fuels the commitment required to achieve them.
In this post, we discuss how unified goal planning helps your goals by investing less today. Unified goal planning takes all your financial goals and calculates one SIP amount you need to invest by optimising across all goals. The combined SIP in a unified goal approach is less than the sum of the individual SIP required to achieve the goals separately.To reiterate, a financial goal has three components -
Purpose - eg. daughter's college education Amount - eg. Rs30 lakhs Time - eg. in 12 years
As a first step, it helps to list out all your goals.
Let's start with an example - a 27 years old with a current monthly expense of Rs 45k is planning for the following goals: in 5 years (buy a midsize sedan worth Rs 16 lakh today) New Car in 14 years (peg to Pune's cost of college with an 8% education inflation rate) Daughter's college in 17 years (peg to Pune's cost of college with an 8% education inflation rate) Son's college in 33 years (retirement corpus of ~2.5 Crores to maintain his current lifestyle) Retirement
Your set of goals will be specific to you, so treat the above as an illustration. Part of a good goal planning system is to calculate how much you need to invest today. These calculators, popularly called SIP calculators, tell you the amount needed to be invested each month to achieve your financial goals.
Here is what our goal calculators show as SIP for the above goals -
So if you plan for all the goals separately, you need to start investing Rs36,800 today.
If instead, you used a unified goal planning approach, the SIP required would be much lower, Rs26,600 per month in this case. With a unified portfolio approach, you start with a SIP amount that is 28% lower and still have the same set of goals.
How does this really work? Let's simplify and see the math behind this. Say, you have two goals -Goal1 - requires a SIP of Rs 5000 for 5 years
Goal2 - requires a SIP of Rs 10,000 for 10 years
A simple advise would be invest Rs 15,000 for 5 years and then Rs 10,000 from year 5 to 10.
Notice this - Your SIP amount is not constant for 10 years You are being asked to invest more now and less later. Your income, on the other hand, is likely to increase over time. Regardless if you can invest Rs 15,000 today you can invest Rs 15,000 five years from now, so you shouldn't be asked to decrease your SIP amount.
In unified goal planning, we say how can we better this? Using a unified goal planner we calculate that you can invest Rs 12,000 every month for 10 years to achieve both the goals. So start smaller today and never change your SIP amount. Isn't that more intuitive?
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.