We discuss the most crucial steps in defining and planning for a financial goal. Only after the goal is defined should one consider products for investments. Sadly, most investors have a product-first, plan-later approach.
A goal provides direction and a sense of purpose. Only when we know the destination can we plan how to get there. Harvey Mackay said, “A dream is just a dream. A goal is a dream with a plan and a deadline.”
So what is the goal here? Let us assume it is to buy an electric car. We will not get into the petrol vs diesel vs electric vs hybrid here. We will assume the bottom line here is, “if I buy a car, it will be electric”. There will be pros and cons associated with this choice, but this is not the place to debate them.
“I want to buy an electric car (without a loan)” is just a dream, as Mackay says. It is just an arbitrary thought which serves no purpose.
‘If I had enough cash, what kind of electric car would I buy?’ This is the first step. What kind of electric car is suitable for my need? Which manufacturers sell this car in India? Among the models available, which are suitable for me?
🔥Secure your future with our Robo-advisory tool trusted by over 3,500 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality. 🔥
Subscribe for money management solutions via email! (Link takes you to our email sign-up form) Join 32,000+ readers in our community.
👉 New Tool Alert! NaviPlan: A Privacy-Focused Multi-asset Tracker and Goal Planner 👈
This is not an easy process and would require hours of research and perhaps consultation. There are many such discussions in the personal finance Facebook group Asan Ideas for Wealth, where the admin Ashal Jauhari himself, is a car enthusiast, and there are other members like Ragesh who can provide sound assistance. This, for instance, is an article by Ragesh: Used Car vs New Car: Which is a better buy?
We shall assume the model we want is a Volvo C40 electric. This is an arbitrary choice for the purpose of this article. Please note, by the time you read this, this model may have been discontinued. The financial planning process will not change.
“I want a Volvo C40 Recharge” is still a dream, but it is a specific dream.
Next, I need to ask, What is the “cash” necessary to buy the X60 today? Let says this is about 80 Lakhs including all fees.
“How much do I have now?” For this kind of goal, if 80 Lakh is the target price today, I better have at least 50-60% available with me right now. There are far-off goals like retirement and a child’s education, where ‘no cash available now’ should not be much of a problem. So This is quite contextual.
” I want an C40 costing about 80 Lakh today, but have only 40 Lakh to spare” is still a dream but with information about why it is impossible to realise it today. Also, “spare” means all my essential goals, like retirement and my child’s education, are in place, and I can truly spare this money.
“I want an C40 in 5 years” is a dream with a deadline, and we now have a financial goal. However, it neither has a target nor a plan attached.
“What would be the estimated cost of the C40 in 5 years?” To calculate this, we need an estimate of inflation. Let us say it is about 10%.
So 80L x (1+10%)x (1+10%)x (1+10%)x (1+10%)x (1+10%) = 129 Lakhs (rounded off)
“129 Lakh is necessary to buy an C40 in 5 years” is a financial goal with a clear target but no plan attached.
The next questions to ask are, in addition to the 40L, how much should I invest each month, and where should I invest all this money?
At this point, asset allocation and return expectations from each asset class (equity, fixed income) are necessary. This can be automated with the freefincal robo advisory tool.
Even with a 90% fixed-income allocation (6% post-tax return), the investment amount necessary is about Rs. 91,000 a month. Since this is a “want” and not a “need”, one can aim for a higher return by investing in equity or equity-oriented hybrid fund and perhaps invest a lower amount.
If we aim for a 9% return, each month’s investment is about Rs. 83,000. We will assume that the existing Rs. 40 lakhs will also be invested with a similar return expectation. This is only one of many ways to plan.
“129 Lakh is necessary to buy an C40 in 5 years. To achieve this, Rs. 40 Lakhs lump sum and Rs. 83,000 a month will be invested with an expected 9% post-tax return.”
Now we have a financial goal with a clear target and a plan in place. We start investing, review progress once a year, make necessary course corrections, and hope for the best.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
Use our Robo-advisory Tool to create a complete financial plan! More than 3,000 investors and advisors use this! Use the discount code robo25 for 20% off. Plan your retirement (early, normal, before, and after), plus non-recurring financial goals (such as child education) and recurring financial goals (such as holidays and appliance purchases). The tool helps anyone aged 18 to 80 plan for retirement, plus six non-recurring and four recurring financial goals, with a detailed cash flow summary.
🔥Join our community of 9000+ users! 🔥Avail massive discounts on our courses + freefincal investor circle!
Track your mutual funds and stock investments with our Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds, ETF screeners, as well as momentum and low-volatility stock screeners.
You can follow our articles on Google News
We have over 1,000 videos on YouTube!
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth!
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalised investment advice. We can write a detailed article without mentioning your name if you have a generic question.
About The Author
Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 14 years of experience publishing news analysis, research and financial product development.
Connect with him via Twitter(X) LinkedIn YouTube
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market conditions! Watch the first lecture for free! One-time payment! No recurring fees! Lifelong access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Increase your income by getting people to pay for your skills! More than 900 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for side or passive income, we will show you how to do it by showcasing your skills and building a community that trusts and pays you. (Watch the 1st lecture for free). One-time payment! No recurring fees! Lifelong access to videos!
Our book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting a side income via content writing. It is available at a 50% discount for Rs. 500 only!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy
Freefincal is a News Media organisation dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact Information: To get in touch, please use our contact form. (Sponsored posts or paid collaborations will not be entertained.)Connect with us on social media
Our publications
You Can Be Rich Too with Goal-Based Investing
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
Your Ultimate Guide to Travel
