Last Updated on September 20, 2021 at 8:39 pm
One of the first steps towards taking control of ones financial life is to list down all long-term and short-term goals that one needs funds for. The next step is to use a calculator to estimate how much one needs to invest for each goal independently. The results can often be frightening and sometimes even depressing. The total monthly investment amount needed to achieve all long term financial goals (let us call this Y) is often out of reach because of low salary, high expenses, liabilities and so on.
At the end of the day all one can do, at any point of time, is invest what one can. This often implies we either get rid of unimportant goals, decide to opt for full/partial alternate funding (eg. educational loan) or simply postpone some goals. While this is an important practical step, there is one more step you can consider before your choose to modify your long term goals.
The total investment required for long term goals can be optimized by integrating the goal investment process. The idea is not to worry about individual goal requirements and simply invest an amount ‘X‘ each month. As the corpus grows, specific amounts required for particular goals are deducted as and when needed. Ideally, if X is the ‘right amount’ then the final corpus value will be equal to the sum required for retirement.
If X is lower than Y (total monthly investment amt obtained by treating each goal as independent) and is an amount which can be spared then we don’t have to modify our goals. We have a reasonable chance of achieving goal targets even with a lower sum (X) provided other assumptions are reasonable. To aid the chances of getting X lesser than Y, we assume that the monthly investment X increases each year by some predictable percentage. This often makes a big difference and X can be significantly lower than Y. If one has liabilities (home loan etc.) at present and can afford to invest a higher sum a few years down the line, X can be decreased even further. So the idea of the exercise is to determine X: the lowest monthly investment required to achieve all your long term financial goals.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
You can use the attached goal-investment-optimizer to determine if X is a low enough number for you. The model like any other must be used with precautions.
- It works with a single rate of return irrespective of durations associated with different goals. That is a goal 5 years away will not differentiated from one 20 years away. This is not practical because a 5 year goal can never have the same asset allocation as a 20 year goal.
- This means that the model is best used for truly long term goals. That is ones which are at least 10 years or more away.
- Just because we have obtained a X which is manageable does not mean we are guaranteed of success. Like with every calculator, success depends on how the parameters (inflation, rate of return etc.) entered turn out in real life.
- The model motivates us to start investing immediately with whatever we can. It is not a recipe for success.
- If we can invest more than X then we should definitely do so, unmindful of this optimization.
Features of the goal optimizer
- A retirement calculator which accounts for tax on corpus at the start of retirement in addition to tax on pension. These features are not available in my other retirement calculators
- Five goals in addition to retirement can be used for optimization.
- You can include two future investments (when current loans end)
- Excel Macro which implements the ‘Goal Seek’ function.
Credits
- Chenthil from Horus Financials pointed out this method to me first.
- Here is article which explains this idea to the investor: How a Financial Planner can add value through savings optimization?
- Here is one which explains this idea to an advisor: The Fallacy of Goal based Investment ‘Tagging’
- When I implemented this idea in Excel I was unaware of the ‘Goal Seek’ function. I used linear regression to determine X. This works fine but is not the best way of implementation. If you are interested the old version can be found here: Optimize Your Goal Investment Amount
- Arun Prakash pointed out that ‘Goal seek’ can be used to implement this in a simple way.
Download the Goal-investment-optimizer
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
![Follow Freefincal on Google News Follow Freefincal on Google News](https://freefincal.com/wp-content/uploads/2023/07/Follow-Freefincal-on-Google-News.jpg)
![Subscribe to the freefincal Youtube Channel Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.](https://freefincal.com/wp-content/uploads/2023/07/Subscribe-to-the-freefincal-Youtube-Channel.jpg)
![Follow freefincal on WhatsApp Channel Follow freefincal on WhatsApp Channel](https://freefincal.com/wp-content/uploads/2023/09/Follow-freefincal-on-WhatsApp-Channel-300x83.jpg)
![Listen to the Lets Get Rich with Pattu Podcast Listen to the Lets Get Rich with Pattu Podcast](https://freefincal.com/wp-content/uploads/2023/07/Listen-to-the-Lets-Get-Rich-with-Pattu-Podcast.jpg)
![Lets Get RICH With PATTU podcast on YouTube Lets Get RICH With PATTU podcast on YouTube](https://freefincal.com/wp-content/uploads/2023/08/Lets-Get-RICH-With-PATTU-podcast-on-YouTube-644x362.jpg)
- 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 personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
![Pattabiraman editor freefincal](https://freefincal.com/wp-content/uploads/2019/11/Pattabiraman-author-freefincal-article-bottom.jpg)
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 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 condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 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 who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
![Both boy and girl version covers of Chinchu gets a superpower](https://freefincal.com/wp-content/uploads/2021/02/Article-bottom-Chinchu-gets-a-superpower-front-cover-for-girls-and-boys.jpg)
![Feedback from a young reader after reading Chinchu gets a Superpower (small version)](https://freefincal.com/wp-content/uploads/2021/02/For-bottom-Feedback-from-a-young-reader-after-reading-Chinchu-gets-a-superpower.jpg)
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 side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization 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: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
![You can be rich too with goal based investing](https://freefincal.com/wp-content/uploads/2016/11/You-can-be-rich-243x300.jpg)
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
![Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you want](https://freefincal.com/wp-content/uploads/2017/05/2-mini-Cover-pink.jpg)
Your Ultimate Guide to Travel
![Travel-Training-Kit-Cover-new](https://freefincal.com/wp-content/uploads/2019/11/Travel-Training-Kit-Cover-new.jpg)