(FREE Download) Financial Goal Planning Excel Worksheet

Financial Goals Worksheet Download

My last post – All you need to know about your REAL Financial Goals was received extremely well. And given that it was almost 3500 words long, I was happy to see that many of you did read it ‘completely’ 🙂 and mailed me back regarding its usefulness.

But several mails also asked me share the goal planning worksheet that I discussed in the post.

So here is a simple Personal Financial Goal Planning Worksheet. It’s fairly basic but still useful to get you started.

You can download it using the below link:

[ Click to Download FREE Financial Goals Worksheet ]

Or drop me a mail if you are unable to do so. I will send it to you directly.

Please note that the worksheet will help you:

  • List down all life goals
  • Identify important ones out of them
  • Identify which are ‘Needs’ and which are ‘Desires’
  • Categorize them into short term goals, medium term goals and long term goals
  • Prioritize each of these goals
  • Rationalize goals and costs if need be

The worksheet already contains several pre-populated examples of personal financial goals (short-term, mid-term and long term goals). You can either use them as your own (if relevant) or fill the sheet with your own unique goals.

[Strongly] Suggested Readings:

Once you have honestly filled up the goal planning spreadsheet, you will be in a good position to further explore answers to these important questions:

  • Cost of goals in future?
  • How much you need to invest for these goals (monthly SIP or lump sum)?
  • Where to invest for these goals?
  • Whether existing investments can be earmarked for these goals?

You can answer these questions on your own or take help of trustworthy and professional investment advisors. But whichever approach you take, the final decision in goal setting process will be yours.

After all, its your life and your goals… and ofcourse your money. 🙂

But this worksheet won’t help if you are not convinced about the whole idea of saving money for future. If that’s your case, I suggest you also read this article on Save vs Spend. It will help clear your thoughts. And by the way, tax saving is not a financial goal. So don’t list it as a goal. 🙂 Though it should be a desirable side effect of a good financial plan.

So download this free financial goals excel worksheet. I hope you find it useful… atleast as a first step towards putting your finances in order.

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financial and life goals

Financial Goals – How to Set + Not Mess Up

financial and life goals

The two words ‘Financial Goals’ are fairly simple to understand.

It’s the ‘WHY’ of your investing(s) and saving(s). It’s the reason why you are ready to cut down your spendings today and put aside a part of your hard earned income for tomorrow. (Remember Save vs Spend debate?).

But… a lot of people invest without having a clear idea about what they are saving for.

They do have some idea about their major life goals but investments are mostly random. Or in many cases, driven by the need to save taxes (big mistake!).

But let me tell you one thing.

If you are aiming for beating the market or your friend’s portfolio returns, then you need to get a reality check. No doubt you will get emotional high and increased bank balance when you beat the market. But will that ‘beating’ be sufficient to help you achieve your goals?

Many people have no idea how to answer that question.

And this is one important reason why goal-based investing makes more sense for most people. I have already created a detailed guide on goal based investing. But I wanted to delve deeper into something that is at the core of goal-based investing.

You guessed it right, I am talking about…

GOALs

And more specifically…

Financial Goals

When it comes to planning your finances, one of the most critical things that you would be doing is identifying your financial goals.

This is ‘the’ first step.

If you have no specific goals that you are targeting, then you will be investing randomly in different financial products without knowing whether it is helping you get closer to your goals or not.

Its just like travelling without knowing your final destination or taking random paths. See below:

Setting Financial Goals Travelling

And this not advisable for most people.

But if you think that you are still ‘too young’ to bother about setting your goals or financial planning, then you are mistaken. Starting early on this path has eye-popping rewards. Don’t believe in the myth that goal setting is only for old people or for people in a certain age group or income bracket. It can be helpful for people at all stages of their lives. After all, everyone has financial dreams and needs.

So lets move on…

Life Goals –> Financial Goals

As humans, we are not born thinking about our financial goals.

Isn’t it?

As kids, we had various goals in life and we didn’t care what realities were and whether we were capable of achieving those goals or not. Its only when we grew up that reality sank in.

When I was a kid, I wanted to be an astronaut. That was the goal of life then. But as you might have guessed, that didn’t work out :-). And for me, it was like coming to terms with the reality that in life, we can have anything but not everything.

But lets leave my childhood and come back to the present.

We can have several goals in life. And sadly, many of these life goals require money – Yes…. can’t do away with that.

Goals like buying a house, children’s education, their higher education, their marriage, good retired life, early retirement, living a good life even before retirement, travelling, etc. — all require money.

And hence, these life goals are also your financial goals.

There can be other life goals too that might not be clear-cut cases of being financial goals. Like helping your close relatives, etc.

So when referring to financial goals, its mainly about the ‘significant goals’ of your life that require money. By significant, it is meant that these are important as well as cannot be met through regular income. So you need to save for these goals.

Life and Financial Goals

For example – Your kids’ school education is obviously important. But you can manage the monthly school fee through your salary. But when it comes to children’s higher education, you cannot meet the requirement from your regular income/salary. You need to save for it for years. So that is how we identify a significant financial goal – which in this case is your child’s higher education.

Goals must be S.M.A.R.T.

This is a very popular acronym used in context of goal-setting everywhere (including financial planning).

S = Specific

M = Measurable

A = Achievable

R = Relevant

T = Timely

Without using a lot of words to explain this theoretical concept, understand it like this – when these 5 requirements (i.e. S, M, A, R and T) are taken care off while setting your goals, it becomes a well-defined and strong target and not just a weak wish.

Here is the difference:

Wish – “I think I should have a big house in future”

Goal – “I have to buy a 3BHK in Mumbai for about Rs 40 lacs in next 3 years.”

The difference is clear.

Unlike a wish, a goal is:

  • Specific: Its clear what type of house is to be bought where
  • Measurable: Its not using general words like ‘big or small’. It’s a 3BHK.
  • Achievable: Ofcourse its achievable. We are not planning to buy a Taj Mahal here.
  • Relevant – Its relevant for the person who has this as goal. It is what he wants.
  • Timely – A clear deadline is set to achieve the goal

So…without doubt, your goals must be smart. Now lets move on and see how to go about setting your actual financial goals.

List down all Life Goals

Goals tell you where you want to go. And its only when you know where you are headed, you can decide what path to take. Isn’t it?

So when listing down your life goals, its imperative that you think hard. Take time to reflect on all the goals that come to your mind.

Ofcourse major ones are obvious, which include short as well as long-term financial goals – like buying a house, children’s education and marriage, retirement, etc.

But depending on your exact situation, you might have other goals that might be important for you. Like a good friend of mine is saving to gift his wife a big diamond ring on their 5th anniversary. 🙂 (I hope my wife doesn’t read this).

Please understand that as of now, you are just listing down all your goals. It doesn’t mean that all of them will be planned for and invested towards.

Pro Tip – Include your spouse when listing your goals, irrespective of whether your spouse is earning or not. It will help getting a different perspective and also because it can help avoid future disagreements about how to manage money.

Here is a sample listing:

List of Life Goals

Having several goals doesn’t increase your chance of achieving them. Its better to focus on fewer goals instead to get the best result. Its also because your income is limited and you want to use it to save for the important and correct goals.

Also, some of the things that need to be done (like reducing your unmanageable credit card debt, paying off your brother’s small personal loan, etc.) might not be your life goals. But nevertheless, they are your financial goals.

So your list of life goals gets converted into list of financial goals. Here is a list of financial goals derived from life goals (with additions and deletions where necessary):

Life to Financial Goals

By the way, I have used a simple excel to list down these goals. You may call it setting financial goals with help of a Financial Goals Worksheet. Though I find it easier to do it in excel, if you want, you can use simple pen and paper to do it too.

Now once you have listed down all the goals, you need to identify which are worth planning for and which aren’t.

Tag all Goals as ‘Needs’ or ‘Desires’

Next step would be to tag each of your goals as either NEEDs or DESIREs. You can use other words too but idea is simply to differentiate between essential goals and non-essential (or lets say good-to-achieve) goals.

For example – Saving for your retirement is a NEED. You can’t do away with it. But saving for a foreign trip next year is a DESIRE. It can be postponed, have its budget reduced, etc.

Here is a sample tagging for goal list that was shown earlier:

Financial Goals Needs Desires

Some goals might seem like both a need as well as desire. I can quote a personal goal of mine here – Travelling. Its a DESIRE for most people no doubt. But for me, Travelling is also a NEED. 🙂

If you too are facing such a dilemma, don’t worry. Its not a big problem. Just be reasonable in tagging. Don’t tag a goal like ‘Purchasing SUV’ as a need when you are unable to even pay your bills on time.

Ideally, the goals that are NEEDs (or Essential goals) should get priority over other ones. But that is easier said than done. We are humans and we need to simultaneously take care of multiple goals. You cannot keep saving for just one important goal (like retirement) and not do anything for others. You will screw up big time.

But tagging your goals like this can help clear your thoughts about what is important and what is not.

Categorize all Goals as Short, Mid and Long Term Goals

All goals are not similar and neither have to be achieved on the same day.

So now categorize all your goals (both NEEDs and DESIREs) according to their time horizon. One way to do it as follows:

  • Immediate Financial Goals (in next 1 year)
  • Short-term financial goals (1 to 5 years)
  • Medium term financial goal (5 to 10 years)
  • Long term financial goal (10+ years)

So this is how goals of previous points can be categorized as per time available:

short medium long term financial goals

This time period based categorization of your financial goals gives a lot of clarity when doing financial planning. That’s because a major factor that decides where you should be investing in (i.e. which assets and financial products), is time available for the goal.

Assign Priorities to Your Goals

Now you need to assign priority to your goals. It might look similar to the earlier differentiation of Needs Vs. Wants. But its not.

If it was possible to achieve all your life goals at once with the resources you had, then financial planning would be unnecessary. And it would be an ideal world where your needs as well as desires would be satisfied on demand. Instant gratification would rule. 🙂

But it’s the real world we live in. And we do not have unlimited supply of money.

We simply cannot have everything we want and whenever we want.

We need to accept tradeoffs, as the resource available (i.e. money to be invested) is limited. So you need to prioritize your goals.

It helps to identify important goals even within the categorization we made earlier (Needs and Desires). Once identified, resources will be allocated accordingly. This ensures that important goals are taken care off first. But this also means that money may not be left to satisfy all other less priority goals.

This is the tradeoff that prioritization of goals helps in dealing with.

You decide what goals will be satisfied first and which will be second, and which won’t be done until till very last.

As an investment advisor myself, I can vouch for the importance of this prioritization. As Michael Kitces says:

Ultimately, the key may not merely be to give clients a comprehensive list of recommendations, or to tell them what steps they should take next, but instead to help them make the choice of what’s most important to them and then hold them accountable to follow through on it.

Here is a sample prioritization of the goals we are discussing as example:

financial goal priority

The prioritization can be different for different people.

Some goals can have similar priority for some people while different for others. For example – many people are of view that children should take care of their marriage expenses. Some think otherwise. So priorities can be different.

Now what if your goal priorities change later on?

That will definitely happen in real life.

Nothing to worry. You will need to adjust your investments later on, so that they remain relevant as per your priorities then.

Now goals have been listed, categorized and prioritized. So are we done now?

No.

Aren’t we missing something?

Yes we are.

 

What is the cost of each Goal Today?

You cannot move ahead without knowing the costs. Isn’t it?

What is the cost of these goals today? When you answer that question, only then you will be in a position to know the real cost of the goal in future (after adjusting for inflation).

A engineering degree that cost you Rs 5 lac about a decade ago can easily cost Rs 15 lac today. Fast forward another 15 years when your child might be starting his higher studies, the cost might have gone up to Rs 50 lacs or even more.

So knowing a goal is fine. But you also need to anticipate how much it will cost in future. And the only way to know it is to realistically assess two things:

  • Cost of Goal today
  • Inflation applicable to the goal’s cost in future

If you fail to account for inflation, you will end up saving woefully less than what is actually required in future. And that will be a sad as well as scary situation to be in.

So here is how one can assign costs to various goals. The figures are hypothetical:

financial goals example costs

Chose Your Final Goals Wisely

Now comes the tough part. Your income is limited and it might not be sufficient to fund all your goals.

So you will need to pick the goals you want to go after.

You might consider saving for some goals first as these are important. Other goals can be saved for (or postponed) later on. For example – You might want to postpone your plan to go for a foreign trip every 2-3 years till you have bought a house (and obviously cleared off the loan).

You might also consider reducing the targets for some goals. For example – In current example, instead of saving Rs 15 lac each for two children’s marriage, you can save Rs 20 lac combined for both of them.

Here is an example of rationalization:

financial goal rationaliztion

But How much to Invest for my Financial Goals?

You have listed your goals. You have identified which are NEEDs and which are DESIREs. You have categorized them into short, mid and long-term buckets. You have prioritized them. You know their costs today. You have further rationalized them.

Great work…

But now What?

The answer is that now you need to know 4 things:

  • Cost of goals in future?
  • How much you need to invest for these goals (monthly or lumpsum)?
  • Where to invest for these goals?
  • Whether any existing investments can be earmarked for these goals?

The answer to these questions is given by Goal-based financial planning (<– I strongly suggest you read this post)

If you are good with numbers and understand how to read numbers from real-life perspective, then you can carry out goal based financial planning yourself. Or else, you can take help of trustworthy and competent financial advisors who can help you do just that (I can help).

So after going through all the steps, your financial goals worksheet will look something like this:

financial goal planning worksheet

Or here is another sample of how you will get an action plan to achieve your financial goals:

sample financial plan

Be Careful about Where you Invest for different Goals

I want to highlight this point, as this is what most people get wrong when trying to do things on their own.

Different goals require different investment plan and strategies.

Using single asset allocation and risk tolerance for all your goals in the investment plan can be a big mistake. Infact, it can be disastrous.

But question is how much should you invest and how should you distribute it across various assets? Goal-based financial planning helps people understand exactly how to invest and where to invest to achieve most (if not each) of their goals.

In general, we have a fair idea about various assets. Equity gives best returns in long term but it can be risky and volatile in short term. Debt gives stable and predictable returns but these can be lower than inflation – which defeats the purpose of investing. Cash is good for liquidity and cannot be used for investment as inflation beats it.

So lets see which assets are suitable for which types of goals:

Short-term goals (Upto 5 years)

Risky assets like equities are best avoided for such goals. More so if goals are high priority or critical. Some people might still be interested in investing a small part in equity for these goals. It might work for them. But everyone should understand that any losses that you incur on the way may not be easy to recover from in time, given the short-term horizon of these goals.

Medium-term goals (between 5 and 10 years)

Investments can be made in both risky as well as in safe assets in a balanced manner. The idea is to balance the safety of capital with the need for higher returns.

Long-term goals (more than 10 years away)

One can invest in assets that have a higher long-term return potential for the long-term goals. Best suited asset for this is equity. Even then, most people fail to realize the potential of equity and invest primarily in debt instruments like EPF / PPF / Pension etc. for their ultra long term goals like retirement planning.

It is important to understand here that a long term goal will not remain long term foreverAs the goal date approaches, it will effectively become a short-term goal.

For example, when you are 35, your retirement is 25 years away, i.e. its a long term goal. But when you turn 55, it will only be 5 years away, i.e. its changed into a short term financial goal. When this transition begins, you should ideally start the process of slowly reducing the riskier equity component of your goal-specific portfolio. This will reduce the risk of large losses as you near goal completion.

Note – These are general and broad goal-specific asset allocation suggestions. The exact allocations will differ from one case to other depending on several other factors.

Need help with financial goals worksheet?

Click here to grab a FREE Financial Goal Setting Excel Worksheet

 

Feeling Overwhelmed?

If you are reading this and already feeling a little overwhelmed with the big numbers being thrown around in name of these personal financial goals, then please relax.

Its true that financial planning is generally focused on dealing with larger financial goals. But I don’t want you to be overwhelmed and demotivated at the sight of these seemingly big numbers. They may seem distant or unachievable.

But this is where smart financial planning based on concept of goal based investing can help.

It can breakdown large financial goals into smaller and manageable pieces. So for example – you get a simple, easy to implement retirement plan that will tell you exactly how to go about building up (with small monthly investments) that multi-crore corpus you need for your retirement.

With Goals Clear, Start Working to achieve them

Its only logical to put your efforts in something that you really want to achieve.

Since now you already know what your goals are and how you need to invest for each one of them, there is only one thing left for you. And that is to take action.

You might have noticed that I have not mentioned much about saving taxes or chosing the right products (like specific mutual funds names, etc.). It is because things like tax saving are secondary. More important is ensuring that you are investing correctly for your goals. Tax saving should not come in way of proper investing plans.

Similarly, once you have finalized the goals, you can start putting in place separate investment portfolios for each of them (or group similar ones) with proper asset allocation. Goals come first and products come later.

So it will be more equity (via increasing SIP in equity mutual funds) for long term goals. On the other hand, more debt (via debt funds, bank deposits) for short term goals.

Ofcourse the goal allocations also depend on your risk appetite. But above suggestions are broad and common way to go about investing for goals of different time horizons.

But its best to find the right balance of equity and debt investments, for your unique personal financial goals. And this can be done correctly only via detailed financial planning.

So take some time out to identify, streamline and finalize your financial goals.

You should be saving and investing correctly and in line with goal-specific requirements. Investing randomly without any goal will not take you anywhere.

One Important Advice by a Chinese Man I met in Egypt

Few days back, I returned from a short trip* to Egypt.

*Also the reason why I didn’t post any new articles in last couple of weeks. 🙂

Advice Chinese Man in Egypt

Egypt is a lovely country. But this post is not about the destination. Instead, its about an important piece of advice, which a Chinese man gave me there.

Like me, this Chinese gentleman had come to Egypt on a mini-vacation. But unlike me, he was quite old. My guess is that he was over 65.

Since both of us were on the same ship on Nile River cruise, we did get several opportunities to get talking. Luckily for me, he was good in English.

From our talks, it became obvious that he was a big-time traveller. He had travelled to more than 15 countries. But he had one big regret – he started travelling quite late in his life (early 50s).

Here is what he said as far as I can recollect (not his exact words though):

____

I always wanted to travel. But more often than not, my travel plans were put on the back burner. Reasons? Can’t get enough leaves from office. Don’t have enough money for such expenses. Other financial commitments and what not.

I thought that in a few years, I would have enough money to travel as much as I want. But these ‘few years’ went by very quickly. I am travelling now as much as I can. But I repent that I did not travel much when I was young. My body would have better supported my wishes then.

I now have enough money to visit most places that I want. But I will not be able to experience those places as well as what most young people can.

When I look back at my life, there are moments that I am proud off and there are those that I regret.

And waiting (to travel later) is what I regret now.

Most people (whom I know and) who waited to travel the world later in life, never did.

You my friend – are young. You have time at your hand. And this time will not come back. If you really want to experience the world out there, you should travel as much as you can and as soon as you can. Don’t wait.

_____

I don’t know about others but I am one person who doesn’t need much push to go on a vacation. It’s difficult for me to imagine a life without travelling regularly and disconnecting from routine life.

Infact, I am a firm believer that traveling can change us in ways that few other things can. World is both a big and a small place. And you get to realize this only when you are away from home.

Don’t think that I am against having a life with routine. It definitely has many advantages and helps get things done.

But unfortunately, we take so much for granted in our routines (that many are stuck with for years and even decades), that it makes us numb. We need to get off this autopilot-treadmill to realize the dynamics of life.

When we travel, we break the routine. We make ourselves uncomfortable. And this switches off the routine-controlling part of the brain and makes us feel more alive.

We wake up in real sense.

Travelling forces us to see things from a new perspective. We learn so much more about ourselves. And here is the interesting part. Its not just the travel that changes us. But the ‘coming back home’ too plays a part. Traveling changes you in a million ways. But you don’t realize how much until you are back home. 🙂

But coming back to what this Chinese gentleman was telling me.

To be honest, I was in total sync with what he was saying. His advice of ‘Don’t postpone life for tomorrow’ makes a lot of sense.

But there are many who just don’t want to travel or believe in this philosophy. This post is not about them.

Rather its for those who want to travel but don’t or cant, due to various reasons. Some are in a race to end up with the highest possible bank balance. For this, they are ready to sacrifice things that they really want (like spending time with family, travelling or whatever). Others have genuine financial constraints.

I know what many of you would be thinking.

You have financial responsibilities (financial goals that are not optional). You are already finding it tough to save for all these goals. Then how will you find more money to travel?

Its a big financial dilemma.

Whether saving for important life goals means you can’t pursue other passions like travelling.

To be honest, there is no right answer here.

Ideally, there has to be a balance between enjoying today while also preparing for tomorrow.

But everyone has to find their own unique balance. A balance that allows you to pursue your real passions today, while also allowing you to sleep peacefully at night, knowing that you are well prepared for tomorrow.

A friend of mine is a big-time traveller. And his personal finances are totally screwed up. He at times takes personal loans to travel. I don’t think its wise to take such an extreme approach. Maybe he will realize it later. Then at the opposite end is another friend of mine, who is a big-time rat race runner. She is keen on adding zeros to her networth and is ready to hell-with-everything-else. 🙂

I am somewhere in between these two friends. That’s because having a balance increases sustainability of the strategy.

For me, travelling in itself is a big (recurring) financial goal.

I try to visit a new place every 6 months.

My wife and I have a dedicated travel fund where we contribute 5% of our monthly income for this goal. When we zero down on a destination, we can withdraw money from this fund. So our regular budget is not disturbed. Or it can be vice versa. We check the balance of travel fund and see what all places can we visit given our budget.

Ofcourse this means having less money for other goals. But that is fine with me. As of today, achieving financial independence (or FIRE) and travelling are two of my biggest goals.

The world (as well as India) is a stunning place. Unfortunately, life is too short and the world is too big. And I don’t just want to read about it. I want to see it first hand.

There are many who would question me for this approach.

But money is not everything – not even close.

And to be honest, time is the real currency we have. Its limited and sadly, we cannot buy or borrow more of it. So there is really no point in trying to be the richest man in graveyard.

So as long as I can do it, I will travel as much as I can. I don’t see any point in waiting until I’m old to experience these moments because by then, it might be too late.

I don’t want to sound preachy here (and my apologies if I do).

These are my thoughts and not everyone might relate to it.

So spend money on experiences you value most. Splurge on things you really want (but don’t be greedy or foolish). Don’t shortchange your life today. Don’t live a unnecessarily constrained and ultra-frugal life that will make you regret not having lived life to the fullest. But also make sure that you keep one eye on your future. You don’t want to screw it no matter how much you believe in future-has-no-guarantees kind of theories.

You want to make sure that you make the most of the time your life has given you. Isn’t it?

What is Goal-based Financial Planning Anyway?

goal based financial planning

When it comes to investing, most people are concerned whether their investments doing good – with respect to a benchmark or not (this benchmark can be an index, a friend or even a well-to-do family member).

But ask them about whether their investments are on track to achieve their real financial goals and they would be clueless.

They might have some idea but its mostly vague.

The sad reality is that most people don’t invest for goals. The general idea of investing is related to the need to make more money, without any specific target.

Though aiming for ‘more money or returns’ cannot exactly be called as wrong when it comes to investing, fact is that it is equivalent to shooting in the dark.

Ideally, we should know what we are aiming for.

Goals.

Do you have goals in life?

I bet you do.

Unfortunately, most life goals require money.

Now combine these two things – i) goals and ii) your investments.

And answer this question now:

Your life goals are important. Since many of them need a lot of money, is your investing helping you achieve those life goals?

You might say that since your investments are beating the markets, you will achieve your life (financial) goals.

But that is not true.

You will only achieve your goals if you are investing the right amount and it is earning the right returns.

Wildly beating markets when your investment amount is not sufficient won’t help you achieve your financial goals.

And that is where Goal Based Investing comes into the picture.

I will talk about this brilliant approach in a bit.

But before that, let me be frank with you. If your investments are doing well today, you might feel that all this talk about financial goals and investing according to a goal-based plan is nonsense. But believe me, it works. And more importantly, it helps you achieve things you really want.

And I am sure you are human enough to not just want to beat stock markets. You cannot eat relative (over)performance. Isn’t it?

You would definitely have normal goals like owning a house, travelling, saving for children, retirement planning for retiring at age of 60 (or even better – planning for early retirement), etc.

Lets move on..

Are You Making this Big Financial Mistake Too?

You have money (lumpsum or regular surplus) that you want to invest. You now want to know which are the good mutual funds or stocks that you can invest in. Or maybe, you want the names of some safe debt funds to park your money.

Haven’t you thought on those lines?

I bet you have.

Most people think that picking the right mutual funds (or stocks) is the most important thing when it comes to investing.

And it is indeed important.

But its not the most important thing.

Since I started my investment advisory practice, many people have reached out to me to ask for stock tips and ‘best mutual fund’ kind of recommendations. I explain them that without having any information about what their future needs are, I cannot morally tell them anything useful. And this surprises them.

But I don’t blame them completely.

Indian financial industry (which is full of agents and distributors having incentives that are not totally aligned with those of clients) is to be blamed too. Instead of first understanding what the client actually wants to do with the investment in future, “the industry operates the other way around – products or strategies are promoted first, and “financial goals” are just words on a brochure.” [The Reformed Broker].

These people “prescribe before they diagnose. They first create a product or portfolio and then try to convince people to invest in it. They try to make a sale without first gaining an understanding of their potential client’s circumstances. It’s completely backwards.” [Ben Carlson – Wealth of Common Sense]

Coming back to the point here…

Before even trying to find the best mutual funds or stocks, its more important to know why you are investing first?

And by ‘why’, I mean… ‘Really WHY?

I am sure it is not to just beat the market or others.

Think about what will you do with all the money later on? What do you want to spend the money on? What are your main goals for saving and investing?

Think…think…

Buying a house or making a downpayment for it. Funding children’s education. Retiring well and wealthy. Buying car(s). Going on foreign trips every couple of years. Whatever it is.

That’s it!

Those are some good examples of real financial goals.

Knowing the goal is most important.

But why are we even talking about Goals?

Money is simply an enabler.

Having tons of money and being the richest man in graveyard is useless. Money should help you achieve your life goals.

What can be your goals?

Any or all of the following:

  • Buying a house
  • Buying a car
  • Children’s education
  • Children’s marriage
  • Retirement planning
  • Aiming for early retirement (and tell your boss to F*** off)
  • International holiday (one time or recurring)
  • Purchasing other high-value items like a diamond ring for your wife
  • Putting an Emergency Fund in place
  • Modifying your house
  • Starting a business

Note – Tax Saving is not a goal. It is a side-effect of good financial planning. (Never invest in random and unsuitable financial products just to save taxes. You will end up losing much more than what you save in taxes.)

Having a goal helps you know exactly why you are doing something.

In investing, having well-defined financial goals help tell you the following:

  • How much you need to achieve this goal today?
  • How much more will the goal cost in future?
  • How much time is left to save and invest for the goal?
  • How much you need to invest (regularly or one time) to achieve the goal?

And these are important questions.

Now do a small mental exercise with me.

Pick a goal you have (let say you need to buy a house). Now try answering the above mentioned four question in context of the goal you picked.

If you don’t have answer to all these questions, then goal based financial planning can help you figure out everything you need to. And mind you, finding the answers to these questions is the first step towards increasing the chances of your achieving the goal.

So why goals?

Because they help keep the ‘real need’ of money on top of your mind. And that is important. To ensure that you stay motivated to keep investing sensibly for long time.

Talking of goals, it is important to understand that your (life) goals can be different from others. They can be smaller or larger. They may need more or less money. Here it is important to understand that your goals are yours.

personal financial planning goals

There is no point comparing it with others. And as Carl Richard says, “We run into problems, when we start comparing our goals to everyone else’s goals, or worse, start adopting them as our own.”

It is like trying to enter another rat race. You are a rat even if you win.

Further, “Competing over something as personal as personal finance switches our focus from what actually matters to us in our real lives to the goal of simply beating someone else. It increases the odds that we’ll make a decision in pursuit of winning, but as a result, it may end up costing us what matters most to us. That seems like a high price to pay.” (When Competition Obscures Financial Goals)

That was about goals.

So finally…

What is Goal Based Investing Anyway?

The philosophical idea behind the strategy of goal based investment planning is that – it should help people achieve their life goals as and when they want.

Success of a goal based investment strategy is measured by a person’s progress towards achieving each stated financial goal.

Risk too is not viewed as outperforming or under performing a benchmark. It is instead viewed as the probable failure to fully achieve each goal.

And this actually makes a lot of sense.

The objective here is not to be the best investor in the world. But to fulfill most of your financial goals without taking undue risks.

So in bigger scheme of things, the biggest risk for you as an investor is being in a situation where you cannot achieve your life goals. And then, beating the benchmarks might seem useless. Remember that you are more than your investments or assets. You are you.

Goal based investing differs from traditional investing methodologies, where financial performance is defined as a return against an investment benchmark.

Also, instead of pooling all assets into a single portfolio, separate goal-specific investment portfolios can be created for each goal. If that sounds a little cumbersome at first, then let me tell you that its not that difficult. Its fairly intuitive and can be easily handled. But I will get back to it in sometime.

Suggested Readings (detailed):

By now it must be broadly clear to you as to what goal based investing is and why it makes sense. If not, don’t worry. I will be getting into more details in later part of this post. And its not difficult to understand.

But for now, lets try and understand two simple core ideas that are used to create the real action plan (how to invest, where to invest, till when to invest, etc.) based on the philosophy of goal based investing.

Two Core Ideas

Core Idea #1

When you are investing for different goals, the biggest factor that helps form a reasonably reliable investment strategy is – the Time horizon for the goal (time available before goal day).

The amount of time available will define the type of risk you can take and the assets (products) you should be investing in.

So even though equity has the potential to give highest returns, it is not suitable for short term. Its the best way to invest for long term goals. As for the short-term goals, debt is a better option.

With respect to time available, there are broadly three types of goals:

Short Term Goals (less than 5 years)

Return of capital is more important than return on capital for these goals. Debt products are more suitable as a loss in such a small time frame might not be easy to recover from, in time to meet the financial goals.

Long Term Goals (> 10 years)

Equity is the best asset class for long term. It has historically given highest average returns for this time horizon and there is no doubt that it won’t be repeated in future too. So ideally, for goals that are more than 10 years away, major portion of the investments should be in equity.

Medium Term Goals (5 to 10 years)

For these goals, one can balance the need for safety of capital with that of need for higher returns. So one can invest in both equity (high risk) and debt (low risk) assets in a balanced way.

To sum it up, short term goals demand less risk to be taken. Long term goals allow higher risks to be taken. For medium term, its better to balance the risky and safe assets.

Please note that even though ‘time available for the goal’ is the most important factor, it is not the only factor. Several other factors like risk appetite, overall financial situation of the individual, income stability, etc. also play a role in creating the investment strategy.

Lets move on to the second core idea now.

Core Idea #2

A person can have many life goals. And honestly, some can be quite unreasonable and beyond the reach given person’s means and perceived financial ability.

So the second core idea is to identify goals that are important. And for that, you need to separate your goals depending on whether they are Needs or Wants.

Or rather call them:

  • Must-Achieve Goals (no option but to achieve)
  • Good-to-Achieve Goals (can delay, reduce or not achieve too)

Lets take a few examples:

Must-Achieve Goals: Retirement Savings, Children’s Education (assuming you want to fund it), Buying first house, etc.

For these goals, failure is not an option. Or it might hurt to fail or underachieve these goals. So you might not be willing to take a lot of risk with these goals.

Good-to-Achieve Goals: International Holiday, Big car or SUV, 2nd house, etc.

These are discretionary goals and so you have some leeway. You can delay them or reduce the budget if you don’t have enough money. In worst case, you can drop these goals too. But if you are investing and these goals are sufficiently distant in future, you can take higher risks.

financial goals types

It is worth noting that this exercise (of differentiating between need and want) will take time. It can even take few days if you really think through it alongwith your family (most importantly spouse). You might even have to drop some goals (i.e. discretionary ones / wants) as they may be beyond your financial ability and since you already have other more important ‘Must-Achieve Goals’ to take care of.

Most times, you as an investor will have multiple goals to invest for. And many times, quite a few of your goals would be conflicting with each other. Like whether to save for that international vacation you want to go to or to make prepayments for your home loan. You only have a limited money to invest (sadly). So you need to prioritize your goals accordingly.

Another very important point to understand about financial goals is that all goals will not have the same risk capacities. (Yes – goals too have risk capacities just like you as investor have risk tolerance.)

A goal that has a low risk capacity is one where the consequences of not achieving the goal can be horrific. An example of a goal with low risk capacity is emergency fund. You don’t park your emergency fund with a view to earn high returns. More important is to have access to the money when you want (even at a very short notice). By not taking risk with it, you are ensuring that your emergency fund will not shrink due to market ups and downs, just at the time you need it the most.

On the other hand, a goal can have a high risk capacity if its investment horizon is long enough to allow for achievement of the goal through ups and downs of the markets, and/or if the goal isn’t completely compromised should markets do poorly. An example of high risk capacity goal can be purchasing a holiday home on a hill station. In most cases, it’s fairly long term and so your portfolio has the time to weather the market’s ups and downs. In addition, this goal is discretionary in nature and hence, you can take higher risk with it.

As you can see, an investment approach that is driven by goals adds clarity to your financial life.

So to sum up the core ideas (1 and 2), goal based investing encourages you to identify your important goals, know how much time is available and what are the suitable asset classes to invest for them, whether you can take risk with those goals or not.

Essentially, you will be creating buckets of individual goals depending on available time horizon and risk tolerance for each.

short medium long term financial goals

When you start investing for each of these goals, you will be tracking the progress for each one of them separately instead of portfolio’s overall performance.

This might sound a little odd at first but this is what will help you stay on track to achieve your financial goals in real sense. “By tracking each goal separately so that they can be monitored more accurately, investors will have a much clearer picture of how well they are succeeding.” [Source]

But beware, this does not mean that goal-based investing guarantees goal achievement or profits or anything. There are no guarantees in financial landscape. Remember that.

So moving on, to achieve all this, you need to go for goal based financial planning. You can do it yourself or take help of any trustworthy investment advisor.

How to do Goal-based investing? Here is a simple 7-Step Process to develop a Financial Plan

If all this is making sense to you now, then it means you are concerned about something more than just beating stock market returns.

You want to take an investment approach that considers and prioritizes all your major life goals.

So here is a simple 7-step process that tells you how to create a financial plan that uses your financial goals as the key driver:

Step 1 – List down all financial goals (refer to core idea #2 to decide which ones are real goals and which aren’t)

Step 2 – Against each goal, put the time (years) left before the goal is to be achieved.

Step 3 – Note down the cost of the goal today (money needed if the goal was to be paid for today).

Step 4 – Using reasonable inflation %, calculate the future cost of the goal.

Step 5 – Depending on how distant in future the goal is (core idea #1), chose the mix of asset class you should be investing in (and its expected returns).

Step 6 – Calculate how much you need to save each month for this goal. This requires some tricky financial maths (you might need online calculators or find some good financial advisor whom you can trust). 

Step 7 – Start investing (obviously).

Some important things to note:

  • Don’t guess the cost of goal today. Reach out to people who are paying for those goals today to know the real numbers.
  • Don’t underestimate inflation (and it can be different for different goals and much more than what RBI publishes periodically).
  • Like you income increases every year (hopefully), the amount you can invest too should increase every year. This should be considered in step 6.
  • For chosing the right asset class mix and products for investing, use core idea 1 (consider no or very low equity for short term goals; higher equity component for long term goals; balanced mix for medium term goals)
  • Don’t consider returns more than 12% for equity and 8% for debt. Many people consider 15% or even more. That is very risky. (read why below)

Very important:

Calculations in step #4 and #6 depend on two very important assumptions:

  • Expected rate of inflation
  • Expected rate of return from investments

And people make the mistake of underestimating inflation and overestimating return from investments.

Even a small change in these numbers can have a big impact on the amount needed to be invested every month, especially for long term goals.

So if you use lower-than-actual inflation % and higher than reasonable return expectations from your investments, it will drastically reduce the investments amount needed (in step 6). And this will paint a false picture that you can invest very less and still achieve your financial goals. This is a sure shot recipe for financial disaster.

So its better to lower your expectations, even if it means that you need to invest more. Its always better to be surprised positively in future than negatively when it comes to financial goals.

Will it really work? Any Guarantees?

That is a very important question to ask.

After all, whether the goal-based investment plan works or not will only become evident after few years. And it might be very late for you at that time. Isn’t it?

So you are right in asking this question.

Take a simple example from your childhood here.

Suppose you were to give an exam and had to study for it. Inspite of having studied the entire syllabus, you can still get questions in your exam that you cant answer. Isn’t it? But if you don’t prepare well (i.e. leave out a major portion of your syllabus while preparation), you can be reasonably sure that you will not pass.

Same is the case with goal based investing.

An investment plan that is prepared using reasonable assumptions (actual cost today, inflation, returns from investments), is expected to work in most cases.

There is no precise figure that I can quote. But its not 100% (remember no guarantees). My guess is that it will work about 80% of the time.

But it’s not all-or-nothing here and doesn’t mean that you will completely fail in remaining 20% of the time. In the remaining 20% scenarios, you might just fall short of your target, but not miss it completely. So if lets say your goal for child’s education was to have Rs 50 lac after 15 years, maybe you will have Rs 40-45 lacs. You can easily bridge that gap with education loan. Or if it’s a discretionary goal (like international holiday), you can reduce the budget or postpone it a little.

Having said that, there is an inherent advantage when it comes to goal based financial planning.

When you set up different investment plans for different financial goals, each portfolio will differ from one another.

A typical set of different goals (with investment plan) might look something like this:

sample financial plan

Knowing how much to invest for different goals ensures that you don’t over or under invest for any particular goal. This ensure that you are not compromising one goal with respect to other (unless you mid-way decide that goal is not worth achieving itself).

This goal-based structure ensures that you are always keeping a track of where you are with respect to your goals. And at regular period reviews, you can assess whether there is a need to take corrective action or not.

A goals-based financial planning process can pay off better in the long run compared to more traditional strategies.

But most people are unable to give weightage to superiority of investing with a long term goal based plan as they are in a short-term performance mentality. They want to see quick results and want to become rich overnight. But that doesn’t happen. And honestly, its tough to change that mindset.

But then, onus of achieving their life goals is on people themselves. Nobody can help them unless they allow themselves to be helped.

Such people need to be objective enough to see what works and what doesn’t. And if they have been investing using traditional methods for years and aren’t satisfied with results, then maybe they need to explore other options (like goal based investing).

A whitepaper titled Does Goals-Based Investing Help Achieve Better Investor Outcomes? by IMCA (Investment Management Consultants Association) brings this point clearly:

Having spent time identifying goals, time horizons, and degrees of urgency of each goal, investors have taken a huge step toward a better understanding of their relationship with their wealth. Too often, even for very affluent families, there is a profound disconnect between “my wealth” and “what it does for me.”

Going through the process of identifying what proportion of current assets is required to meet each and every goal helps change that very rough perception to a real sense of what the wealth is doing to and for the investor.

But not everyone is comfortable keeping a separate portfolio for different goals. The argument is that it is cumbersome. This is true to an extent if you have a large number of goals with different investment requirements. To circumvent this problem, you can club goals that are similar in risk profile and time horizons (like children’s higher education + children’s marriage).

Then there are experts like Michael Kitces who feel that goal based investing focuses a lot on goals – something that many people are not very sure about. He says that that “in practice the goals-based approach doesn’t always go as smoothly as hoped. Some clients haven’t crafted their goals yet in the first place, while others have goals that are wildly unrealistic.”

I agree on this to an extent.

Being a registered investment advisor myself, I have seen people face problems identifying and rationalizing their own financial goals.

Many have never really thought about it before. If you ask them, they might give you some basic goals like saving for retirement. (Many times, they will counter-question immediately with questions like how much money do I need to retire at 60? Or how much is needed to retire at 50 or even 40?)

But retirement planning is not the only financial goal for most people. There are several other important goals on way to retirement.

And sadly, many people have no real plan to achieve them. They need sufficient hand-holding to help them identify and prioritize all their goals.

At times, many of the goals are wildly inappropriate given their income, assets and ongoing savings.

unrealistic financial goals.jpg

But having said that, I also feel that it is actually the responsibility of investment and financial advisors to help clients articulate their future goals and then provide recommendations for how the clients can best achieve them.

So practically speaking, goal planning and rationalization is a two-way relation between client and financial advisor. And this is the reason I am a little skeptical about the extent to which Robo-Advisors can help clients beyond an extent.

To get a more advanced and complete perspective of goal based financial planning, you can also read this and this (though these are slightly advanced).

So…

What should you do NOW? And especially if you are Young?

I have already written enough about importance and practicality of goal based investing for common people like us. So I won’t go into details again. The exact process too has been covered in one of the above sections (titled 7-Step Process).

One suggestion that I will make now is that since goal setting is extremely important part of the process, do not rush into identifying goals. I mean – don’t get this step wrong.

Hastily constructed, ill-conceived financial planning goals or goals-copied-from-others will do more harm than good as they can take you in wrong direction.

Most important thing for you is to START NOW.

No matter where you are and what your life stage, you need to start.

start investing now

If you are young, then you have an advantage.

You can plan for really long term and achieve more by saving less. Yes. That correct. You can achieve more by saving less (Proof – Investing for 10 years pays more than investing for 30 years). And it happens because you give your investments more time to grow and allow compounding to show its magic.

So..

  • Think about your life goals.
  • Chose few important ones among them as financial goals
  • Create separate investment plan for each financial goal
  • Track them periodically and individually

What if goals or your life situation changes?

That is certainly possible.

Goals are dynamic and can change depending on your life stage. Also because we don’t know how life will turn out in the long term. Therefore it is very important to re-visit all your financial planning goals periodically (atleast annually) and make course corrections and tweak your strategy as the situation demands.

I will conclude now.

I am a stock investor myself. So I cannot deny that beating benchmarks doesn’t give me a high. Its an awesome feeling indeed. But I am also a regular guy with common financial goals. For which, I don’t want to take big risks.

So beating benchmarks is fine. But goal achievement is important too.

And so, if my goal-based investment portfolio helps me achieve my goals, it has done its job.

For most people, saying (at the end of life) that you beat Sensex by 2% or 3% doesn’t mean much. But as Ashvin Chhabra (author of The Aspirational Investor) said, “’I invested well, I had a nice house, my kids went to a good school,’ – that’s something.”

I personally believe that goal based investing gives people a better chance of reaching their financial goals. And this approach to create a financial plan can provide more utility-adjusted wealth in the long run.

I myself implement it for one of my main goals – F.I.R.E.

And unless you are a great investor yourself (and that’s easier said than done), approaching investing without a goal based perspective will make it difficult to achieve long-term success in your personal financial life.

Just remember that properly investing according to a financial plan based on goals, can really help you pursue personally meaningful goals. And since the objective is to minimize the risk of not reaching your goal and not just to outperform a benchmark, it makes a whole lot of sense.

Think about it.

If you have any questions related to goal based investing or financial planning, do contact me using this form or drop a mail at dev@stableinvestor.com