Prioritise investments when saving for multiple goals

What do you do when you have many goals, but not enough money for all of them?

Sounds familiar?

Let’s say you are a 37-year-old, earning Rs 1.10 lakh per month with regular household expenses (including rent, school fee, etc.) of about Rs 60,000 a month.

Like everyone else, you also have goals such as buying a house, saving for son’s higher education, daughter’s higher education, their marriage and your own retirement. Now let’s say you run the numbers and find that if you were to begin today, you need to save the following amounts every month.

So if you wish to begin saving for all the goals simultaneously, you would need Rs 75,000 every month. But the problem is that the surplus available is just Rs 50,000 (Rs 1.10 lakh income - Rs 60,000 expenditure).

As of now, it seems that you cannot invest fully for all the goals simultaneously. One way to increase the investible surplus is to cut down on some expenses. But that is easier said than done, as most are unavoidable expenses that cannot be wished off. So, no matter how much you wish to save, you will always be limited by your spends given the current income. Another obvious option is to search for a new job that pays you sufficiently more so that investible the surplus (after all expenses) is at least Rs 75,000. At least now you have an idea how much raise you need. Right?

Link investments to targets

And this is one more reason to link all or most of your investments to real goals. That way, you at least know how much you need to save to actually move forward towards goal achievement. On the other hand, those who invest randomly are generally not so sure whether they are on track to meet their goals. Remember, no matter how good an investor you are, you will be successful only if your investments help you meet your goals.

What if you can neither reduce expenses nor get a better paying job due to several reasons? Save as much as you can (Rs 50,000, where the actual requirement is Rs 75,000) and hope for the best.

Sounds stupid? Yes. Hope isn’t a strategy but do understand that when saving for goals, there are two things that matter—(i) how much you save and (ii) what return it generates over given timelines. And, if you assume very high (unreasonable) returns in your calculations, then the required investment amount will come down.

The expected average returns in the given timelines are much higher than the original ones and, as a result, the total monthly savings required has come down to Rs 50,000—which if you notice is equal to the investible surplus available earlier.

So is the problem solved?

Of course not. Because, you cannot expect to earn such returns and if you believe so, you are just fooling yourself. So how do we actually solve this problem? Do not expect any miracles here. But here is what can be done from a practical perspective:

- Seriously consider looking for a higher paying job and when you get it, ensure that your regular expenses don’t rise accordingly. This way, you will have a higher surplus to save for the goals.

- Some goals are more important than others—like saving for your children’s education is more important than funding their marriage expenses. So, for time being, consider deprioritizing saving for marriage till your income increases.

- Remember, retirement is more important than children’s goals. And if you are unable to save properly for retirement, then consider only part funding children’s education goal, as education loans can help bridge the gap (or you can save more when your income increases). You may think that once your children’s education is over, you can save more for retirement. But that is a risky strategy to follow as you never know when you might be forced into involuntary early retirement due to a changing economy or because of health reasons. It’s difficult to pick and choose from goals when all are important. But what needs to be done should be done. It is difficult but necessary.

Unless you can increase your income to fund all goals adequately, you need to prioritize and rationalize the goals. Remember, more the goals (and bigger the goal amounts), slower will be the progress towards each goal.

(The writer is the founder of StableInvestor.com)