Goal-Based Investing: The Smart Way to Reach Your Financial Goals | Spring Money

We all have a long list of goals we hope to accomplish in the future. This can include purchasing a car, or a home, going on a trip, arranging for a quiet retirement, and so on. As a result, it is natural to feel overwhelmed and concerned about how you will attain all of your objectives.

If you're not financially prepared, retirement can be a stressful period even though it should be a time of enjoyment and relaxation. One simple trick to start preparing for retirement is to start planning to invest as soon as you start earning.

This is when goal-based investment comes in handy. Goal-based investing is all about identifying your financial goals, creating a timeframe for each one, and investing for them on a regular basis in order to achieve them. Therefore, in essence, you structure all of your dreams and financial goals.

Difference between the Traditional and Goal-Based Approached

Traditional Approach

Goal-based Approach

In the traditional method, the investments are made first and then allocated to the goals to be achieved. It prioritizes maximizing returns on investment over attaining the goal. This approach has the objective of investment in stocks, mutual funds, bonds and FDs etc.

In the Goal-based investing method, the capital is allocated as per the goals decided by the investor. Goals are categorized as either essential needs, lifestyle wants or legacy aspirations depending on the level of importance. This approach has the objective of deciding the goals like higher education and buying a house, or car and then choosing the investment products like stocks, mutual funds, bonds, FDs

Things to consider before starting a Goal Based Investment

1. Make a personal financial plan.

If you've never created a financial plan before, take some time to sit down and honestly assess your current financial status before making any investment decisions.

Identifying your objectives and risk tolerance is the first step to successful investing. You can do this on your own or with the advice of a financial expert. But, if you learn the facts about saving and investing and implement an educated plan, you should be able to acquire financial security and enjoy the rewards of money management over time.

2. Evaluate your risk tolerance

All investments have some level of risk. If you want to buy assets, such as stocks, bonds, or mutual funds, it's critical that you understand the risk of losing some or all of your money before you invest.

The potential for a higher investment return is the reward for taking on risk.

3. Diversification of Investments

Diversifying your investments is one of the best strategies to reduce the risks of investing. Remember the golden rule: don't put all of your eggs in one basket.

You can protect against severe losses by integrating asset categories with investment returns that fluctuate depending on market conditions inside a portfolio. Traditionally, the returns on the d

ifferent asset classes have not moved in unison.

How to go about goal-based investing?

Once the goals, time frame, and amount required is established, the next stage is to decide on the necessary actions. Saving for them is a prudent course of action.

Saving alone does not work:

Just saving for the objective is insufficient. If the interest rate on your savings account is less than the rate of inflation, you will not be able to accomplish your objective.

As a result, you would need to invest in the correct investment products in order to achieve a larger return on investment.

The blanket strategy doesn’t work:

Your investment plan cannot be based on a single financial product. To properly accomplish all of your goals, you might need to mix and match various investment products, depending on your risk tolerance.

It re-frames the results based on the investment as decided while making the goal.

As an example, the asset allocation for post-retirement funds might be 30% equity and 70% fixed income but in the future, the market can move in any direction. People’s needs and goals are what drive them to invest rather than risk tolerance.

Evaluate expenses before investing:

Before you begin investing, you should examine your monthly income, and expense and calculate surplus. After you go through this process, you could learn that all of your goals may not be reachable with your surplus. You might have to either postpone or let go of the goal, or you may try to expand your investing surplus.

Here are examples of Goal-Based Investing

1. Emergency Funds

An emergency fund is a necessary reserve that you must create in order to deal with emergencies. It is a fund to which you can turn in times of disaster or for unforeseen and unanticipated events, not for covering your regular expenses.

Your emergency fund would depend on the lifestyle you are living, monthly expenses, income etc. On average, you should have 3-6 months of saving for the sake of an emergency fund

2. Education

If this is for a child's education, savings should ideally begin while the child is born along with gradual investments in SIPs.

Goal values will rise with inflation over time. For instance, a college education involves a series of payments that begin with admission examination fees. The bigger the target corpus, the higher the investment amount will have to be increased over time.

3. Retirement Fund

Try to save consistently while you start working. These small savings will eventually end up developing a corpus fund that will help one during post-retirement. Not just the daily expense but will also cover up the rising medical expense.

Conclusion:

Goal-based investing is a new way of investing as compared to "maximising your returns" investing. You may find it apprehensive, though, because it is a really new process with a lot to learn and explore. Yet, it is apparent that this approach ensures future financial security. Thus, if you're looking to save money for a specific purpose, try your hand at goal-based investing today.