Goal-based Financial Planning

29th June 2021 0 By indiafreenotes

Goals-based planning is the process of helping clients prioritize their financial goals and determine the optimal plan to fund them. Goals-based planning expands your focus into all aspects of your client’s financial life and eliminates the retirement-only focus.

Goal based financial planning is a method which can help you achieve multiple goals across different stages of life. There are some common life-stage goals of most investors e.g. buying a house, children’s higher education and marriage, retirement planning and leaving an estate for your loved ones. In addition to these goals, some clients may have other goals specific to their individual needs and aspirations e.g. planning for a foreign vacation, buying / building a vacation home, saving a corpus to start a business, accumulating for early retirement etc. Goal based planning is the process of defining different goals, quantifying these goals factoring in inflation and having an investment plan to meet these goals.

First, you need to know your various financial goals which you wish to achieve over various time periods. Then you need to figure out the time you have in hand to reach those goals. Once you are clear about these two – goal and the time frame work out the present cost of each of these goals. Now, apply inflation to the current cost and you know the future value of your goal.

For example: your current cost of a future goal, which is 10 years away from now, is Rs 20 Lakhs. Assuming the average annual inflation rate at 6%, the future goal value would be Rs approx 36 Lakhs. Therefore, you need to plan investments to reach the goal of Rs 36 Lakhs and not Rs 20 Lakhs.

A great many wealth management firms claim they are financial planners by defining a few large goals such as saving for retirement or leaving a legacy and recommending investment strategies to help you achieve those objectives. However, goals-based planning digs much deeper working with you to crystalize precisely what those vague future concepts actually mean to you.

It can be a difficult challenge to work from a blank piece of paper and write those first few sentences of your financial planning story. Questions such as “What are some of the important financial goals you hope to achieve?” or “How do you envision your retirement lifestyle?” might initially be daunting. But by asking more personal questions, carefully listening to you and offering examples of what certain elements of that story might look like, a good planner can help you bring it to life. A goal of retiring at a certain age and traveling the world is merely a starting point. Meaningful planning then probes deeper into where you hope to travel, how many trips you would like to take each year, and who would be traveling with you.

Life Goal’s

  • Buying a house
  • Buying a car
  • Children’s education
  • Children’s marriage
  • Retirement planning
  • Aiming for early retirement
  • International holiday
  • Purchasing other high-value items like a diamond ring for your wife
  • Putting an Emergency Fund in place
  • Modifying your house
  • Starting a business

Goal based financial planning is usually a six step process:

  • Setting goals: You should lay-out all your goals in different stages of life. You should estimate how much money you need for each and always factor in inflation, especially for your long term financial goals.
  • Expense Budgeting: You should assess your post tax income, your expenses (essential and discretionary), assets (bank deposits, mutual funds etc.), liabilities (car loans, home loans etc.) and create your budget. Once you have a budget, you know how much you can save and invest in a systematic way for your financial goals. Suggested reading: Maximise your SIP returns in volatile markets
  • Assessing your risk appetite: This is an important step in financial planning because you need to take the right amount of risk to achieve your financial goals. If you take too much risk, you may lose your hard earned money due to adverse market movement at the time you need it. If you take too little risk, you may not be able to get sufficient returns to meet your goals. Your risk appetite depends on your age, stage of life, goal time-lines and financial situation. You should always invest according to your risk appetite.
  • Asset allocation according to goals and risk appetite: Risk and returns are interrelated higher risk, higher returns in the long term and vice versa. Different asset classes have different risk profiles, e.g. equity has a higher risk profile compared to gold or fixed income. Remember that for different financial goals, you should invest in the right asset class depending on the goal and risk appetite.
  • Prepare an investment plan: This is the final step of the financial planning process. Once you know your goals, risk appetite and asset allocation profile, the rest of the job is simply to calculate how much you need to save and invest based on goal amount, goal horizon and expected return on investment based on your asset allocation. Sometimes in this step, you may realize that you need to save more and cut down some discretionary expenses. Do not despair, if you are not able to save more. You should start with what you can save. Over period of time, as your income goes up, you will be able to save and invest more. You can use facilities like Top-up SIPs, to increase your investments over time and achieve your goals.

Advantages of having a goal while investing

  • Disciplined investing: Discipline in investing e.g. sticking to your SIPs irrespective of market conditions, adhering to your asset allocation, regular re-balancing of the portfolio etc., are essential in achieving success. Since there is an emotional attachment with financial goals, investors are likely to be much more disciplined in goal based investing.
  • Helps you reduce debt / be debt free: Cost of debt can be a huge burden on your savings and harm your long term financial interests. If you practise goal based investing, you can fund big ticket spending e.g. vacation, buying / upgrading your vehicle, bigger down payment for house etc. from your investments, reduce debt burden and interest payments thereof.
  • Save and invest more for your goals: It is a no brainer that the investor who saves and invests more will be able to create more wealth. Attaching investments to goals, instils greater determination and doing what is required to achieve the goals. It has often been seen that families which practise goal based investing save and invest more.
  • Save taxes: Having an investment plan can help you save taxes under section 80C and also invest in the most tax efficient investment options according to your financial goals and asset allocation.
  • Improve lifestyle in a sustainable way: Despite rising disposable incomes, average household debt in India is rising. This shows that investors are funding their lifestyles through credit cards, personal loans etc. Debt funded lifestyle improvements may not be sustainable. Sometimes it is seen that, parents spend a bulk of their savings on their children’s higher education and then compromise on lifestyle to save for their retirement. If you practise goal based investing, you can improve your lifestyle in sustainable way, without relying on debt or compromising on other financial goals.