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How Goal-based investing lets you do guilt-free spending

Posted on 15 Sep 2021
Author: Sayan Sircar

Tags: Behaviour ; Budgeting

4 mins read
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This post shows you the way to spend money on anything you want without any guilt whatsoever.

HHow Goal-based investing lets you do guilt-free spending

📚 Topics covered:

Introduction
Prioritizing your spending buckets
- Big-ticket items
- Smaller items
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.

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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.

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Worked out case studies for goal-based investing

Case study: how can this middle-aged investor with two children plan for retirement and children's goals?

This article shows how a single-income middle-aged couple with two small children reach their retirement and children’s goals.
Case study: can this double income single kid family reach FIRE at 50?

This article shows how a double-income couple with a 2-year old reach their FIRE dream at the age of 50.
Case study: how a family in their mid-30s with a newborn kid can FIRE and invest in real estate?

This article shows how a double-income couple with a newborn child can invest for their future goals of FIRE and real-estate investment.
Case study: how this double income recently married family can perform DIY goal-based investment planning

This article shows how a young just-married couple can invest for future goals using the Arthgyaan goal-based investing tool.
Case Study: How should couples in their 40s with a new baby plan their financial future?

Did you welcome a bundle of joy in your 40s? This article will discuss ways of planning the child’s (and your’s financial future)
Case study: how this double income single kid family can perform DIY goal-based investment planning

This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.

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Topics you will like:

Asset Allocation (21) Basics (8) Behaviour (12) Budgeting (12) Calculator (25) Case Study (6) Children (17) Choosing Investments (40) FAQ (12) FIRE (13) Gold (21) Health Insurance (5) House Purchase (29) Insurance (16) International Investing (12) Life Stages (2) Loans (17) Market Data (7) Market Movements (16) Mutual Funds (46) NPS (7) NRI (19) News (18) Pension (8) Portfolio Construction (53) Portfolio Review (27) Reader Questions (8) Real Estate (7) Research (5) Retirement (38) Review (15) Risk (6) Safe Withdrawal Rate (5) Set Goals (28) Step by step (15) Tax (59)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself.

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