How to plan for a financial goal: A step by step guide

Published: December 3, 2022 at 6:00 am

This article discusses 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.

Some assume they do not have a financial goal and only want to create wealth. They need to find a way to handle expenses if they can no longer work for a living or simply do not want to. Financial independence and retirement planning is the default goal for everyone unless they are Richie Rich.

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.

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‘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?

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 XC40 recharge. This is an arbitrary choice for the purpose of this article.

Volvo XC40
Volvo XC40. Picture courtesy:

“I want a Volvo XC40 Recharge” is still a dream, but it is a specific dream.

Next, I need to ask, What is the “cash” necessary to buy the XC60 today? Let says this is about 70-75 Lakhs. This is probably an overestimate, but it is better to err on the side of caution.

“How much do I have now?” For this kind of goal, if 75 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 XC40 costing about 75 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 XC40 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 XC40 in 5 years?” To calculate this, we need an estimate of inflation. Let us say it is about 10%.

So 75L x (1+10%)x (1+10%)x (1+10%)x (1+10%)x (1+10%) = 121 Lakhs

“121 Lakh is necessary to buy an XC40 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 Rs. 76,000. 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.

“121 Lakh is necessary to buy an XC40 in 5 years. To achieve this, Rs. 40 Lakhs lump sum and Rs. 76,000 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.

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Pattabiraman editor freefincalDr 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 ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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