A financial goal planner is as much a curse as it is a blessing! A goal planner is the simplest way to recognise the impact of inflation for long-term goals and the need to combat it with a combination of (a) with a portfolio that produces a return above inflation (after taxes!) and (b) by investing enough. ‘But what if I cannot invest enough for my financial goals?’ is a common problem. In this post, I revisit this issue triggered by a recent thread in Facebook Group, Asan Ideas for Wealth.
Step 0: Make some time. Preferably at least 60 minutes, free from all distractions.
Step 1: Create your own financial plan with this financial planning template (trivia: This post will soon hit the 1 million views mark!).
Those who have already use this sheet and can invest enough for all financial goals individually can consider refining their goal planning process with Financial Goal Planner with Flexible Asset Allocation.
Step 2: Let us say the monthly invest required for each financial goal is tabulated as below. The total monthly investment required is about 60K.
(a) If the family can afford to invest this much right away, I strongly recommend that they do so. My preference would be in individual portfolios. More about this below.
(b) Such a large investment amount per month could well be quite huge for many families, esp. those nursing a home loan. I have following suggestions for them.
I Focus on systematic investing and not on the amount invested. It is important to watch wealth grow to feel good and get some confidence.
II For long-term goals (15Y+), considering a more aggressive portfolio. Say with 70-75% equity (at a return of 12%). This has risks tagged with it. Regular rebalancing and perhaps some tactical asset allocation may be necessary to reduce downside risks.
III Consider reducing your aspirations and prioritising your goals. Retirement always is number 1, followed by children’s education and so on.
IV Consider investing in a unified portfolio. That is, imagine a bucket (net worth) filling up from a tap (investible surplus from salary). As and when your long term financial goals are due, you draw money from this bucket. Finally, at the time of retirement, the bucket should have enough funds for inflation-protected income.
The monthly investment required for such a unified portfolio is typically much lower than the total investment amount required for individual goal portfolios. This is because, as explained by Anand Balakrishnan at the Chennai investor meet, future cash flows can be taken into account in this method. For example, we can invest more for our retirement after our children enter college as that goal is finished.
The monthly investment required for such a unified portfolio can be automatically calculated with Excel sheet appended at the end of this post.
Additional investments that can be done, for example after the closure of a home loan can also be factored in as shown in the screenshot.
Notice the reduction from 60K to 45K. This is more a psychological boost for the investor to get going. Of course, it may be possible that even the reduced amount is a tall order. In which case, all that can be done is, ‘invest what one can, and hope for the best’.
This is based on an idea given by Chenthil Iyer from Horus Financials and the first version of this sheet was developed around May 2012.
I strongly recommend using such a unified portfolio only for 10Y+ goals and use separate folios for short-term goals. The projected evolution of the corpus is shown here.
The dips represent withdrawals for each goal. The second graph shows the evolution of the corpus after retirement.
Personally, I feel that there are many practical difficulties with the implementation of a unified portfolio and recommend it only when a family is unable to invest enough. I have listed many of these in a previous post, now renamed as, Financial Goal Planning with a Unified Portfolio.
Download Financial goal planning spreadsheet with a unified portfolio (this will work ‘as-is’ in a Mac too)