When it comes to financial planning, we tend to use a lot of words interchangeably. For example, terms like wants, needs, goals, dreams and objectives are all terms that we use interchangeably. While the precise definition of each of these concepts may differ, we need to understand a fundamental difference. There are two sets of concepts here. On one hand, we have amorphous concepts like wants, needs and dreams which do not exactly have any prescribed form and on the other hand, we have more structured concepts like goals and objectives which form the core of financial planning.
Difference between your needs and goals
The needs refer to an individual’s basic requirements that must be fulfilled, in order to survive. By this, we mean those requirements which are extremely necessary for a human being to live a healthy life. They are personal, psychological, cultural, social, financial that are important for a person to survive.
In ancient times, the three basic needs of the man were food, clothing and shelter, but with the passage of time, education and healthcare also became integral, as they improve the quality of life. These are a person’s priority as these are the things that keep us healthy and safe. Therefore, if needs are not satisfied in time, it may result in illness, inability in functioning properly or even death.
On the other hand, goals are the driving force behind everything we do, the most important things that we want to accomplish. The goals are specific needs with certain objective. A goal should have the following characters:
A goal should be “SMART” in that way.
This is how the concept of need and goal fundamentally differ. Goals can be articulated. That means they can be put down on a piece of paper and they are very specific in nature. When your needs and dreams are articulated, that is when they become goals. Goals call for a proper form and structure to your wants and dreams.
The financial goals are goals you set that revolve around finances or money. Financial goals are targets, usually driven by specific future financial needs. Some financial goals you might set as an individual include saving for a comfortable retirement, saving to send your children to college, or managing your finances to enable a home purchase.
Goal based investing
We all have dreams and desires, but often, we do not plan our investments by setting goals, most people just invest in an unplanned manner. Goal based investing adds direction to an investment. A structured, well thought-out process for investing, where you know the purpose behind each rupee that is being invested is known as goal-based investing. It looks at your existing assets, expense patterns, risk profile, asset allocation and the various short, long and medium-term goals and creates a road map for each of these goals in a predictable manner.
The goal-based planning comprises of two parts – planning & investing. Goal planning notifies the amount that is required to fund the goal and the how much is needed to invest regularly or one-time to get to the desired amount. Investing that amount in the most suitable product helps to achieve the goal without any difficulty.
Getting the best out of goal-based investing
The goal-based investing focuses on meeting goals that are personal and specific. So, instead of measuring an investment’s performance against a variable like index, this approach uses the future value of a goal as the measure.
In this strategy, you should analyse your current financial situation and then set goals. This activity involves in understanding what you want to do with your money and how you want your financial future to look like. To adopt this strategy when investing, one must plan as per one’s age, risk appetite, financial situation and investment horizon.
The goal-based investing is set in three-time frames; short-term, medium-term and long-term.
- Short-term: This has a time frame of few months to one year. It covers immediate goals such as buying a car or going for foreign vacation in the near future.
- Medium-term: This Involves a time frame from one to five years. Medium term goals include buying a house or starting a business in 3-5 years down the line and early retirement.
- Long-term: This Involves plans that are more than five years. It includes goals such as retirement, child education.
Steps on goal-based investing.
- Identify specific financial goals: It is important to write down a proper plan to tie-up each investment with a specific goal. It is crucial to prioritise goals and aspirations and estimate the amount of money it would take to fulfil them.
- Classify the term of goals: It is important to classify your goals in to short-term, medium-term and long-term goals. This helps to sequence your goals and allocate specific amount needed to achieve that goal.
- Decide upon asset-allocation: Identify the assets that would make up your portfolio according to your goals, risk appetite and investment horizon. You can choose between fixed income, equity and real estate. Allocate funds in more than one asset class.
- Choose the right investments: Evaluating the correct risk-return metrics and choosing the right asset allocation can seem complex. Mutual fund offers a good solution in such a situation as it is a smart way of investing in various asset classes. Goals differ from one person to another. For a longer-term goal, it is advisable to focus on return maximisation with asset allocation towards equity as well as fixed income securities.
- Review portfolio: To stay on track, regular review of your goals and investments is necessary. Review the stocks, mutual funds, etc. in your portfolio annually. Certain products may seem tailor-made for specific needs, but do not always do justice to it. Be cognizant of investment products.
Why Should one go for goal-based investing?
As per experts, goal-based investing is the best way to invest when you are saving for something particular, otherwise, you would not know where your hard-earned money is being put. If you are not headed towards your goals with your investments, then you could end up in a place where you did not intend to be. Goal-based investing ensures that the product selected is appropriate for investment and would help you achieve your goals.
Dilzer Consultants Pvt Ltd