How Goal-based investing lets you do guilt-free spending
This post shows you the way to spend money on anything you want without any guilt whatsoever.
How Goal-based investing lets you do guilt-free spending
Posted on 15 Sep 2021
Author: Sayan Sircar
4 mins read
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This post shows you the way to spend money on anything you want without any guilt whatsoever.
📚 Topics covered:
- Introduction
- Prioritizing your spending buckets
- Structuring the household budget via priorities
- A worked out example
Introduction
Our relationship with money can be complicated at times. On one side, we want to enjoy our lives in the present while simultaneously securing our family’s future goals. There are multiple ways of balancing expenses and investing that we can use. We have already spoken about the superpower of “pay-yourself-first.”
We will combine pay-yourself-first with this post on minimum investments needed to retire to ensure that we do not face guilt, fear or anger when spending on the things we want.
Prioritizing your spending buckets
Pay-yourself-first says Expenses = Income - Investments, i.e. spend after you have invested. To reach this state, you need to sit down with your family and decide your spending priorities. It essentially means having a similar conversation like setting financial goals.
Big-ticket items
Housing costs and vehicles are the most significant line items in any household budget. However, over-spending on home loan and car EMIs can divert money from other goals significantly. This is where prioritization comes in. You and your family need to decide on your primary lifestyle:
- Case 1: a small rented apartment in a high-cost location, short commutes, premium schooling, small car or public transport, regular long-weekend vacations
- Case 2: a large house in a low-cost suburb with more peaceful surroundings, a big family car, one extensive foreign tour every couple of years
The options above will not only require spending different amounts of money every month but will create different types of memories and experiences. It is up to you to choose which one you prefer.
Smaller items
These items are more frequent but tend to add up over time. This is called the Latte Factor.
The Latte Factor was popularized by author David Bach. The concept is simple. Small amounts of money spent on a regular basis cost us far more than we can imagine - [Source: Forbes.com: ‘https://www.forbes.com/sites/robertberger/2017/05/27/the-latte-factor-7-key-lessons-we-can-learn-from-a-cup-of-coffee/’]
It would help if you prioritize your spending on discretionary items like this:
- do you care about gadgets vs eating out
- do you want to spend more on shopping for clothes vs movies
- or any other combination that you want
This way, you can spend more money on what you care about and cut down on those items you do not.
Structuring the household budget via priorities
Once your goals and spending priorities are clear, you can then structure your budget so that you can now spend money on what matters to you the most. This is the definition of guilt-free spending.
pie title Income
"X:retirement" : 30
"Y:guilt-free" : 30
"Z:big-ticket" : 40
- X: amount to be saved for retirement
- Y: amount spent for guilt-free expenses
- Z: amount to be saved for other goals and paid as EMI for home/car/personal loan/credit card
A worked out example
Line items in the budget:
- Retirement goal: 30% of income
- Big-ticket: rent on 2 BHK near the office, child’s schooling, college fund: 40% of income
- Guilt-free spending: mandatory monthly expenses, EMI on ten lakh car loan, vacation fund, entertainment, gadget fund: 30% of income
Since the spending happens after retirement and children’s education goals, you can spend this money without worry that you will not meet their future goals.
To reach this state, you need to
- ensure your investing prerequisites are in place
- set your financial goals
- know how much to invest for all your goals on an aggregate basis
- debt payment is on track without high-interest rate debt
- you have a review and rebalancing plan in place for all of the goals
If too many choices and confusing terminology is stopping you, go through this post on starting with goal-based investing to get started immediately.
Related Articles
- What is the quickest way to reach FIRE?
- Life stage investing: how to manage finances when you are joining your first job
- Life stage investing: how should couples manage finances
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How Goal-based investing helps you to cut through the clutter and lets you get started with investing?
This post is targeted towards investors facing too many choices in funds, stocks, and insurance policies, making it difficult to get started.
Published: 14 September 2021
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