A friend of mine was a bit worried about whether he was saving enough for his financial goals or not. He told me that he had been investing here and there for a while but when it came to goals, he was clueless. So, reluctantly, I decided to dedicate my weekend evenings to his finances.
After going through his goals and the time it would take for him to reach there, we realised that the following is the amount of money he would need to save every month to get where he wants to go:
- Elder son’s higher education – Rs 25,000 per month
- Younger son’s higher education – Rs 15,000 per month
- Down payment for house purchase – Rs 50,000 per month
- Retirement – Rs 30,000 per month
This adds up to an investment requirement of Rs 1.2 lakh per month, if my friend decides to pursue all four financial goals simultaneously.
Also read: How much should I invest each month?
But there is a problem. My friend’s current monthly income is Rs 1.8 lakh and his expenses are about Rs 1 lakh. That means he only has a surplus of Rs 80,000 per month (Rs 1.8 lakh income less Rs 1 lakh expenses).
So even if he wants to fully meet all his goals, for which he needs Rs 1.2 lakh per month, he cannot do it because the surplus he has is less than that (Rs 80,000).
Racing against time to meet your goals
What are his available options?
- Try to reduce expense
- Or, earn more!
Cutting down on expenses is not an easy task for most people. At least for my friend, it’s pretty tough as I know his extended set of responsibilities. So let’s leave that aside.
The other option is to get a new, higher-paying job. That is a better bet.
At least now after seeing his investments from the lens of goals, he knows how much more he needs to earn to be able to invest sufficiently for all the goals.
And that is one big benefit of linking investments to goals. You know how much you need to invest and, in a manner of speaking, also know how much you need to earn to be able to do that.
What if I invest in high-yielding investments?
Coming back to the problem at hand now. My friend, after seeing that the available surplus is less than what is required, suggested something: “Can’t we invest for higher returns? Then the investment requirements will come down, isn’t it?”
He was right.
If I decided to use a very high return in goal calculations, then the required investment amount will come down. In fact, if I used 20 percent as the return assumption (I know what you are thinking), the investment requirements for all the goals together would have come down to about Rs 75,000.
But will that be right?
Of course not. Averaging 20 percent annual returns for several years is a highly unreasonable return expectation to have. We cannot just wish ourselves great Warren Buffett-type investment returns.
On a practical note, this is what I suggested to my friend eventually:
Given the limited surplus availability and several goals competing for it, it’s better to reduce the budget for a goal or two. This won’t be easy. But at least temporarily, some goals can be started with a lower investment amount and raised when income (surplus) increases.
Which goals should be given lower priority? I think everyone has their own view on this. But all of us need to face the reality that we can get loans for all things except retirement. It might sound controversial but at times, saving for retirement is even more important than saving for children’s goals.
Pick your goals on priorities
All said and done, there is no point in beating around the bush. The maths is clear. If my friend really wants to achieve his goals on time, then he needs to work towards increasing his income. And for that, it’s time to look for a new job.
If you too are not sure whether you are investing enough for your goals, then it’s best to run through a similar exercise yourself. Find out how much you need to invest for all the goals and then compare it with your investible surplus. You will have a few answers and, also, a few questions to find answers to.
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