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I have heard of goal-based investing. What now?

Posted on 29 Mar 2021
Author: Sayan Sircar

Tags: Basics

7 mins read
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Part 2: As someone who has heard about goal-based investing, how do I get started?

Prerequisites before goal-based investments

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You have now heard of goal-based investing and the basic money equation: Income = Expenses + Investments. This post builds on what is needed next before you actually get started with goal-based investing.

📚 Topics covered:

Prerequisites before you start investing
Step 1: The emergency fund
Step 2: Term insurance
Step 3: Health insurance
Step 4: Personal Accident Insurance
Step 5: Pay off high-interest debt
Step 6: Setup a sinking fund
Step 7: Figure out major monthly expenses
Additional steps

Prerequisites before you start investing

Before investing for financial goals ensure your emergency fund is full, term life, health and personal accident insurance is there and all high-interest loans are paid off.

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Step 1: The emergency fund

This is needed to pay for sudden or unplanned expenditures like medical emergencies, job loss etc and lets you sleep well at night knowing this money is there. For this, you should save 3-12 times your monthly expenses (not Income) in a savings A/C with Sweep FD / bank Fixed deposit (FD) / recurring deposit (RD) and refill the fund once the emergency has passed. Here are more details on the emergency fund.

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Step 2: Term insurance

This allows you to safeguard your future earnings at the cheapest possible cost. Try to get coverage amount is a multiple (15-20x) of current post-tax annual income and take the annual premium (once-a-year) payment option from an insurer you are comfortable with. The premium can be saved via a sinking fund (see below). Here is an article that deals with buying term insurance step-by-step.

Step 3: Health insurance

Health insurance costs are relatively cheap at the beginning of the career so this is a good time to take a family floater coverage (separate from the company-provided one if any) for ₹10-15 lakhs base policy with a ₹50-100 lakhs super-top up. Elderly parents must be covered in a separate policy since due to co-morbidities, their premiums will increase drastically a few years later. The premium, since health insurance can be expensive, can be saved via a sinking fund.

Step 4: Personal Accident Insurance

The purpose of the personal accident (PA) insurance policy is to provide a replacement for your income if you have an accident and cannot work after that. Unlike term insurance, where claims are paid on death, a PA cover is applicable when one of the following is the result of an accident:

accidental death
temporary or permanent partial disability
temporary or permanent total disability

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Step 5: Pay off high-interest debt

Any loan like a credit card or personal loan comes under this bracket. If any extra money is there, then it is always best to pay off the highest interest rate loan first. This will save a lot of money for future investments. If there is a lot of credit card debt, try to consolidate them via a personal loan at a cheaper rate. Typically, home and education loan is at cheaper rates and can be considered separately.

Step 6: Setup a sinking fund

These are known expenses that are usually mandatory (car/life/health insurance payments) but a few of them can be discretionary as well (like mobile phone replacement, festival trips/shopping). The key here is that the expense is periodic at a frequency lower than once a month. Save 1/12th of the annual expense every month (in the same way as the emergency fund but in a different account/folio) and this will smooth out your monthly expenses as well say pay for large annual expenses like insurance premiums. A detailed article on the sinking fund is here.

Step 7: Figure out major monthly expenses

To move on to the next step i.e. how much you can invest for goals (the investible surplus) you need to classify and figure out approximately the major monthly expense heads under the 3 main buckets below:

mandatory: rent/EMI, food, school fees, electricity/mobile bills etc.
variable/discretionary: entertainment, transport, clothes, anything discretionary
save to spend: these are used for the sinking fund covered above

Whatever is remaining after the three cost heads above go into the investible surplus to be used for goal-based investing to be covered in Part 3 of this series. This flips the basic money equation from Income = Expenses + Investments to

Income - Investments = Expenses

You can profoundly change your relationship with money by understanding the concept of Pay-yourself-first.

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Just like a loan EMI gets deducted at the beginning of the month, so the money being invested for goals gets taken out of the salary first and then whatever is remaining is spent. We have covered this concept in detail: How to budget, save and invest in a stress-free manner?.

Additional steps

Get a credit card: The right reason to get a credit card is to build a credit history. Take a simple card, put a small amount in it like mobile/electricity/Netflix and auto-pay that. If you get rejected, many banks give a card against FD which is a good option for first-time applicants. Once you have a good credit history, you will get loans like home loans etc at good rates. Credit cards also can be used in emergencies provided you have money from other assets to pay off the balance. ALWAYS pay off the balance in full since interest rates are very high.
Get KYC done: Mutual fund investments require Know-Your-Client (KYC) to be completed first. This is nowadays online and the mandatory in-person-verification step can be done via video call also. Once done it can be used to invest in any mutual fund.

Open a PPF account in each family member’s name: PPF is a fantastic debt instrument that has guaranteed return (though it keeps falling) but it is still higher than the market rate in other options. Since there is 15 years lock-in (which can be extended in blocks of 5 years) and to keep the account active you need only ₹500/year, open it and keep it active. Later when you need to invest more in long-term debt, both the maturity of PPF will be closed and you will have many options. You can open PPF in your name or in the name of your parents if they don’t have one already. When you get married and have children, repeat this for your spouse and children.

Part 3 of the series: Part 3: I am now ready to do goal-based investing, how do I get started?.

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