Life is all about setting different goals and achieving them one after another. As Tony Robbins said setting goals is the first step in turning the invisible into the visible. When each rupee you invest has a definite purpose behind it, is called Goal based investing.
Goal based financial planning is done for long term, midterm and short term gains. Long term plans typically yield more wealth comparing the other two. A midterm plan could be buying a home where a short term plan may be having a car.
How it is Different from the Traditional Approach
Unlike the traditional approach of investing, goal based investing does not only focus on your risk profile, rather its focus remains on achieving the target. The investment plans should be designed by keeping the goal at the center.
The focal point of the traditional approach remains in selecting areas that ensure safe returns. It finds a safe and sure path to grow money. Whereas, in Goal based investing, realization of the goals defines its ultimate success. Wealth generation is not the sole target.
Goal based investment plans get designed only after doing a detailed research of the investor's net worth, level of risk-tolerance and financial goals. In case of traditional approach, first the risk quotient is calculated and according to that a pre-designed investment plane gets selected.
Benefits of Goal Based Investing
In life, each rupee you spend is a type investment that yields certain results for you. If your goal based investments are planned, well thought out and work for achieving specific goals then they do not affect each other. The benefits of making goal based investments are-
It engages you in making systematic approach towards a better money management.
It is nothing but a good habit that restricts you from making spur of the moment purchases.
Channelizes your money towards building value assets and wealth through proper financial planning.
Increases the achievability of the financial goals of your life.
You can continuously monitor and make changes to your plan in order to reach close to your desired financial goals.
How to plan a Goal Based Investing
Planning a goal based investment requires-
You have to make a list of important life goals that you need to achieve. You should prioritize them according to their importance.
Analyze your money needs. It will help you in clustering your investments according to the upcoming life events.
Cluster your investments in three sections- 1) Short-term, 2) Mid-term and 3) Long-Term.
Now choose viable investment plans and start investing.
Short Term Goal based investments are made to fulfill prerequisites that are going to arise in next 2 years. You have to choose less volatile and low risk areas to invest as you need to turn them into liquid soon.
Mid-term Goal based investments are those where you need the return in next 3-10 years. Long-term goals may include retirement and child's higher education. To meet such kind of goals, you need to accumulate large corpus. For that, you have to give good effort to identify pre-determined asset class and make systematic investment over longer period of time. During the course of time, you should stay invested in your plan irrespective of the short-term market upheavals.
If you tie your financial investments around a time frame and specific life goals, it gets a lot easier to achieve.