Goal based planning helps us to keep an eye on the goal that you are aiming for. Your discipline improves when you invest for a purpose.
Financial freedom is something we all aspire for. When, where and how depends not only on your current situation or your past; but also where you want to be. It is mainly about your future; your aspirations and how well you are willing to focus and save for it. When can you stop working “for” making money?
Achieving financial freedom isn’t like finding big foot. It exists! One of the methods that we recommend is taking a goal based approach: having a goal or a target while investing. Goal based financial planning is like investing in different buckets where each bucket is a goal.
So, for example: The buckets/goals could be as below:
- International holiday: 3 years later: Rs.5 lakhs*
- Child’s education: 10 years later: Rs.25 lakhs*
- Retirement: 15 years later: Rs.2.5 Cr*
*Value at the time of the goal
The bucket based or goal based approach would ensure you invest an amount periodically (ideally monthly) for each of these goals. The asset allocation for each of these goals will be different as the period for each is different, the flexibility of each one also varies. For example, an international vacation could be postponed, but the education goal cannot be.
This approach ensures that your eye is always on the goal that you are aiming for. Your discipline improves when you invest for a purpose. You invest more seriously and also the temptation to withdraw is much lesser. Executing a goal based portfolio can be managed if done on a broader level.
However, like every approach has pros and cons; this approach too has some disadvantages especially if one gets into following this on a microbial approach:
Asset Allocation & reporting: Managing asset allocation for the individual, family and goals can become a hassle while also maintaining asset allocation for each goal. Unless there are systems that help in generating reports that help maintain this; it can become a tedious task if done manually.
Operational issues: If investing based on goals and the management of the portfolio is also done accordingly, there might be a lot of paperwork and operational issues. For eg: The same scheme might be invested in for different goals and hence multiple folios and multiple transactions every time investments are being done.
Despite the cons, it is definitely something that we could follow to help us achieve financial freedom.