5 Reasons why Goal Based Investing leads to success

Before you start a new investment, ask yourself an important question: What exactly are you saving and investing for?

This is a serious moment of introspection! In order to invest for the future you are cutting back on spending your wealth now. There must be some future purpose for this sacrifice—a future goal whose present value and importance outweighs the pleasure of today’s spending.

Goal-based investing is not just “another fancy way” of saving money—numerous studies have started proving that it is critical for maximizing how effectively you manage your money and investments.

Is Goal Based Investing Beneficial?

“Goals” are a personal budgeting mechanism which has been around for hundreds of years! Remember your Grandmother’s old system of separating money into tin cans – one for clothes, the other for groceries and the other for buying gifts? That’s the exact same rationale behind goal based investing. By separating your savings into buckets for clearly defined future objectives, you’ll be reaping multiple benefits. Here are a few:

1. Save Less, Achieve More

By identifying long term goals and saving for them in advance, you’ll actually be saving a lot less out of your pocket over the long term. For example – 5 Crores may seem like a daunting sum to put together for your retirement. But a saving of just Rs. 14,306 per month for 30 years (assuming a 12% return) will lead to the accumulation of a 5 Crore corpus – from an out of pocket saving of just 51.5 Lacs (a growth of 9.71 times the “out of pocket” outlay)

2. Achieve Optimal Returns

A very natural outcome of goal based investing is that you’ll wind up saving into more aggressive asset classes for longer term goals, and into less volatile asset classes for shorter term goals which are say 2-3 years away. In doing so, you’ll automatically be matching your time horizon to your asset allocation. This approach ensures that your money grows at an optimal rate based on the risk level that is appropriate for a particular time horizon.

Rather than viewing ‘risk profile’ at an individual level, one can separate risk taking capacity into goal based buckets and optimize the overall growth of their portfolio in the process. For instance, Goal Based investing will ensure that your long term savings towards your retirement are not channeled into a recurring deposit that gives you a post-tax return of 6%!

Think about this - even if your long term savings take a hit due to a market downturn, you’ll be able to put the situation in perspective by telling yourself that you still have many years to go for your goal, so why worry? Coincidentally, such behavior is also the cornerstone of investing success!

3. Tangible Outcomes

Did you know about the concept of “affect” in behavioral psychology? Essentially, it means that human beings are far more motivated by tangible and specific things than by random numbers.

For instance – knowing that “you have Rs. 2 Lac saved up” isn’t half as exciting as knowing that “you have Rs. 2 Lacs saved up for your daughter’s education”! Isn’t that so?

Setting specific, measurable and realistic goals makes it infinitely more likely you’ll save in a disciplined manner and actually end up achieving those goals! When you can attach a real outcome to the purpose of your saving, you’re far more likely to actually work towards that goal rather than saving blindly without an objective.

4. Guilt Free Spending

In today’s inflationary era, where a single trip to the mall could set you back by Rs. 5000, it’s easy to start “guilt tripping” about spending your hard earned money! Isn’t it unfair that you should feel guilty or uncomfortable about using part of the money you work so hard to earn, towards your own gratification?

Surprising as it may sound - Goal Based investing takes the guilt away from spending! Because of the ‘back of the mind’ awareness that you are saving enough to meet your long term goals for yourself and your family, you’ll no longer feel uncomfortable about spending money for your own personal wants and needs.

5. Debt Avoidance

Here’s a simple Financial Planning tip - If there’s one thing that one should avoid like plague, its debt! Over the course of our lifetimes, we end up incurring Lacs (if not Crores) of debt. Car Loans, Home Loans, Personal Loans, Education Loans, Credit Card Debt and what not!

By setting goals in advance and saving for them in a disciplined manner, you’ll be able to exit the vicious cycle of “fulfillment of desires” followed by “endless months of debt repayment”. You’ll be able to own your home quicker, pay off your child’s education as a lump sum, and retire as an independent senior citizen free from financial worries. What could be better?

In spite of all the merits of Goal Based investing, around 2/3rd of them end up not succeeding, especially without the support of a qualified Financial Planner. Why? To put it simply- a lack of self-discipline and focus! So if you want your Goal Based investment to succeed – stick to your Goals resolutely! Do not liquidate your child education goal fund for a home purchase down payment. Postpone the new car booking rather than drawing upon the 2 Lacs you’ve saved up drop by drop for your retirement! Keep your goal based SIP’s running even when you’re facing temporary financial headwinds. Do that, and you’ll be well on track to achieving Financial Freedom!