Financial planning 101 - Step 6 - Goal planning
The continuing series around financial planning 101.
Step 6: Goal planning
The most common argument that I have heard when I raise this topic around goal planning is
Isn’t it enough that I save 15% or 20% or x% of my income? Why do I need a goal?
It is not. Clear goals are important. If you are in a corporate environment you probably have this drilled into you during your performance reviews.
Goals need to be SMART. SMART goals stand for
Specific – target a specific area for improvement.
Measurable – quantify or at least suggest an indicator of progress.
Assignable – specify who will do it.
Realistic – state what results can realistically be achieved, given available resources.
Time-bound – specify when the result(s) can be achieved.
This principle should apply for your financial goals as well
What do you need?
I would broadly categorise these into duration bound goals. As your investment products that you will tie to these goals will be different.
Immediate term
Emergency funds - unexpected expenses that you might incur. Broken care, emergency medical bills which is not covered, loss of job. Anything else that can happen unplanned.
Short term
Vacation funds - planning for a big holiday
Big expenses - Buying a car, that fancy home theatre system, great new DSLR lens combo that you have been eying for a year now, any other big ticket items.
Near long term
Buying a home - saving for the down payment
Home renovation
Second home etc.
Long term
Kids education
Retirement
By broadly splitting your goals into different buckets help in identifying what financial goals need to be fulfilled by when. This also helps with mapping out how you need to invest in them
How much do you need?
Immediate term - Less than 1 year
100% in fixed income assets
FD, Sweep in accounts
Liquid or overnight mutual funds
Short term - 1 to 3 years
Depending on your risk tolerance this allocation can vary. 80% to 90% in fixed assets, remaining can be a mix of commodities (5 to 10%) and bluechip companies (5 to 10%)
FD, sweep in accounts
Liquid, overnight and other debt mutual funds
Near long term - 4 to 7 years (Conservative investor)
65% in debt instruments, 30% in equity and 5% commodity
Debt instruments - same as above
Equity funds - invest in NIFTY and NIFTY next 50 index funds. Not analysis or rebalancing required. SIP on autopilot
Near long term - 4 to 7 years (Aggressive investor)
35% in debt instruments, 60% in equity and 5% commodity
Debt instruments - same as above
Equity funds - invest in NIFTY, NIFTY next 50, Mid cap 150 index funds. Not analysis or rebalancing required. SIP on autopilot
Long term - Greater than 7 years (Conservative investor)
50% in debt instruments, 45% in equity and 5% commodity
Debt instruments - same as above
Equity funds - invest in NIFTY and NIFTY next 50 index funds. Not analysis or rebalancing required. SIP on autopilot
Long term - Greater than 7 years (Aggressive investor)
20% in debt instruments, 75% in equity and 5% commodity
Debt instruments - same as above
Equity funds - invest in NIFTY, NIFTY next 50, Mid cap 150 index funds. Not analysis or rebalancing required. SIP on autopilot
Need to rebalance
As time goes on and you are getting ever closer to your goals, ensure that you start re-aligning your portfolio to the durations. For example, if you have created a goal for your child’s education which is 10 years away and you are an aggressive investor. Your portfolio will be equity heavy as per the above recommendation.
5 years down the line, you are closer to your goal and you need to reduce the risk from 75% equity to say 60% equity.
8 years down the line, you are even closer to your goal and you need to reduce the risk by moving away from 60% equity to say 20% equity.
Slowly move into safer instruments the more closer you are to your goal. The best way to do this is to tweak your SIP ratios on a regular basis towards your eventual target and annual rebalancing or price based rebalancing approach which ever works for you.
Conclusion
Goals with a clear horizon are important to frame. A clear timeline and horizon not only helps you track your progress but also helps you make projections to see if you are on target to reach those goals.
I use goal planning with a few stretch goals and some regular goals which help me achieve them and motivate me by plotting my progress. It also helps me course correct if I am falling short or if the trajectory is not to my liking.
How do you manage and track your goals? Was this series useful to you? I am looking to do more around writing wills and estate planning. I have a written down a will, but rules governing it are different in different jurisdictions so I will defer from posting here.
Estate planning is something I have not picked up yet. Maybe another post down the line about it when I learn some more.
Leave your comments below.
Good luck and Happy Investing
#MyFatFIRE