The purpose of investing is to fulfill a life goal: set that first
Set a goal before looking for what to invest in
Posted on 03 Jun 2021
Author: Sayan Sircar
5 mins read
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The purpose of investing is to fulfill a life goal: set that first
“If You Don’t Know Where You Are Going, You’ll End Up Someplace Else” - Yogi Berra
📚 Topics covered:
- Risks of investing without a goal
- How to identify your goals
- What if there are no immediate goals
Risks of investing without a goal
Goal setting helps you understand the priorities of your life, set the future of you and your family, understand the various money-related challenges that come and be best prepared for the future financially. Goals give direction and momentum to your financial life:
- direction: if you know why you need it then you know what to invest for. Creating wealth is not a goal. But investing for the purpose of sending your child to Harvard in 15 years is a goal
- momentum: this allows you to build investing discipline and track progress along the compounding journey. Without a goal, it is likely that the money will be spent on frivolous things just because “money is available”.
You will hurt your chances of creating wealth via compounding if goals are not set.
How to identify your goals
Investing without a goal is like getting into a taxi and when asked “Where to go?”, you answer “I don’t know, take me somewhere”. Investing without a goal increases the chances of investing in the wrong thing (either too high risk or too low returns) and that will cause problems once actual goals are identified. Investors should make every effort to set goals first before starting investments.
Goals can be set in many ways:
Think about the future
Here is something you can do:
- Sit and think about your plan for the future and write them down
- Where do you see yourself in life: 5, 10, 15, 20 years from now
- What do you want to do in your career: salaried job, own business, freelancing…
- How long do you want to work? Are you excited by the Financial Independence, Retirement Early (FIRE) movement?
- What are your plans for retirement?
Discuss with family
You are investing for your and your family’s future and building a financially stress-free life:
- Discuss with family members since they are important stakeholders for your journey
- What kind of lifestyle do you want?
- What kind of cars and homes do you want to buy? In which neighbourhood?
- What kind of schools and colleges do you want your children to attend? How will you plan their marriage?
- What kind of retirement do you want to have?
- Target high: for example for a 3 year old’s future college education target medical stream first (higher amount) and later review 10 years later when the child’s choice is more clear (say engineering which is cheaper than medicine)
Revise goals based on life events
It is said that man makes plans and God laughs. While life has ups and downs there are always events that happen and plans require change:
- Higher education/skill enhancements may require a lot of money and planning
- Same for buying a house
- Marriage and children are major life events that require re-planning
- Illnesses and sudden changes like job loss bring risk
- Outlook changes - some want to change careers: job to business or reverse
- Location shift: from Tier 1 to Tier 2/3 city or vice versa or relocation to another country
Set SMART goals
Once you have decided what the goals will be, use the S.M.A.R.T framework:
- Specific: Why do you need the money?
- Measurable: How much money do you need?
- Achievable: Can you do it? Do you need help?
- Realistic: Can you reach this target based on where you are?
- Time-bound: When do you need the money? Is the timing flexible?
Refer to this post for more details: Why Investment goals must be SMART?
What if there are no immediate goals
Is having just “wealth creation” a valid goal?
This is fairly possible for many at the beginning of their career or even in the middle stages. Sometimes the goal-setting process itself takes time. Instead of having stress thinking about goals do this:
- make sure your prerequisites are in place which will take a few months: see this detailed post
- if you are anxious to start, simply start a 50:50 investment in simple to choose equity and debt assets (Disclaimer: Always do proper due diligence before investing and invest only if you believe that it is suitable for your needs).
But as this post explains, it is important to put a target figure around your goals: Why you should chase your target goal corpus instead of returns. Once you know your goals, please move on to the next step of goal-based investing: Part 3: I am now ready to do goal-based investing, how do I get started?
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Discover an article from the archives
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.
This article shows how a double-income couple with a 2-year old reach their FIRE dream at the age of 50.
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.
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)
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 (10) Budgeting (12) Calculator (23) Case Study (6) Children (16) Choosing Investments (40) FAQ (11) FIRE (13) Gold (20) Health Insurance (5) House Purchase (26) Insurance (16) International Investing (10) Life Stages (2) Loans (17) Market Movements (16) Mutual Funds (41) NPS (6) NRI (17) News (16) Pension (8) Portfolio Construction (50) Portfolio Review (27) Reader Questions (7) Real Estate (7) Research (5) Retirement (38) Review (15) Risk (6) Safe Withdrawal Rate (5) Set Goals (28) Step by step (15) Tax (50)
1. Email me with any questions.2. Use our goal-based investing template to prepare a financial plan for yourself
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.
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