Goal Based Investments – A must to do in everyones life

All of us are working hard with different goals. One day we may dream about buying a car, the nest day we may think buying an apartment should be my first priority. But after visiting our friends BIG LCD TV we forget all our goals and rush to buy the TV during the festival seasons.

Now my concern is

   1. Do we need any investment goals in our life ?
   2. Should we set priorities to our goals ?

      Yes, we should have investment goals. The key to investment is to identify, prioritize and plan our goals and work towards it else we might lose track of our goals. If we haven't set any goals, we may be forced to divert our saving, like the case of BIG LCD TV. Hence every one should master the art of goal based investments and should also maintain a disciplined approach to keep saving.

How we may do goal based investing?

1. Write down the major events in our life which are our goals. Then set priority to these goals.

2. Calculate how many months/years it will take to realize every goal.

3. Calculate the cost involved to achieve each of these goals today.

For example, 25 year old Biju has two simple goals: an apartment in the next 20 years and a car in the next 3 years. Today the cost of a 2 bedroom apartment in Biju's area costs around Rs.30 lakh. And a car of his choice is around Rs. 5 lakh.

4.Calculate the impact of inflation as this will affect the real value of your savings.

For the goal of buying an apartment in next 20 years we may assume the rate of inflation based on the average inflation for the past few years, say 5 percent.

To buy a car in the next 3 years which is relatively a shorter duration the rate of inflation could be assumed to be around 3 percent.

Make use of the compound interest rate equation.

Saving require = Current cost * [ 1+ (Rate%/100) ] ^ Number of years.

Saving required for apartment = Rs. 80 lakh.

Saving required for car = Rs. 5.5 lakh.

5. Calculate the tax impact on our investments for each goal.

Biju's goal for APARTMENT is for long Term. Hence he can start a SIP in an equity diversified Mutual fund. Since there is no long term capital gain tax. This investment will be totally Tax Free. Here he can get 18-20% return for the long term investment in equities.

Bijus second goal, CAR is just 3 years away, hence a Recurring deposit with 6% rate of interest will be better. There is also no Tax liability for Recurring deposit.

6. Calculate how much to save every month.

Make use of the Future Value formula in excel. Take an excell sheet.

      1. Set first column as Rate of return.

      2. Set second column as Years From Now.

      3. Set third column as Amount needed per year.

      4. Set FV formula in fourth column, ie “=FV(A1;B1;C1)”.

      5. Now try changing 3rd column till we reach the required future value in fourth colum.

      6. Amount need each month = Obtained Amount needed per year / 12.

For Biju's case

      Amount need for apartment per month = Rs 4600 per month.

      Amount need for car per month = Rs 8300 per month.

7. Start investing for the specific goals.

Here the calculations mainly depend on two factors: the inflation rate and the rate of returns on his investment.

Here we can see the Amount need for apartment is much less, we may even think is it possible to buy an apartment of 80 lakhs after 20 years with Rs 4600/month. But this is possible, because that is the power of compound interest.

But since he want to buy a car in short term and hence he need more monthly installments via safer recurring deposit with lower interest rate.

Hence one should calculate the goals and priorities and most importantly do regular investments into different avenues like Mutual Funds via SIP, RD/Debt Funds and achieve our financial goals. Happy Investing.