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SMART goals: investing step-by-step for buying your dream home

This article offers the steps for identifying, quantifying and investing for buying your dream house.

SMART goals: investing step-by-step for buying your dream home


Posted on 07 Sep 2022
Author: Sayan Sircar
10 mins read
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This article offers the steps for identifying, quantifying and investing for buying your dream house.

SMART goals: investing step-by-step for buying your dream home

Summary:
  • This article provides a step-by-step guide for using the SMART framework to identify, quantify, and invest in a home purchase.
  • We use our goal-based investing calculator to determine if the target goal corpus is affordable, and to arrive at an investment plan that maximizes the chances of reaching the goal within five years.
  • The goal is also adjusted for inflation.
  • We advise reviewing the investment and the goal value at least once a year, and being realistic about your goal.




📚 Topics covered:

SMART framework for Goals

What are financial goals

We have covered why we need to set goals before investing in this post: Set a goal before looking for what to invest in

This post uses the S.M.A.R.T framework to ensure that goals are set in the right way so that you can move on to the next steps of goal-based investing: I am now ready to do goal-based investing. What now?

The S.M.A.R.T framework has the following five components. We will discuss one by one:

  • 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?

If the goal is missing one or more of these attributes, you cannot invest for it meaningfully. In this post, we will apply the S.M.A.R.T framework to save for the downpayment of a home using the Arthgyaan goal-based investing calculator.

The benefit of using the S.M.A.R.T framework is that it will unambiguously show you if you can afford the house or not. We will now walk through the framework to arrive at the result. The process can be iterative since you might have to go back to a previous step to adjust your assumptions.

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Specific: Why do you need the money?

You wish to buy a house. You would have some idea in your mind as to what type of house it would be: flat, stand-alone or plot (with later construction). Maybe you have a target city/location, size (2/3/4 BHK etc.) and amenities (pool, gym etc.) you would like to have.

You should sit down with your family at this stage to brainstorm on these points. It is not that important to perfectly narrow down the exact type of house as long as you have some idea in mind.

Measurable: How much money do you need?

Once you know the type of house, location, size and amenities, it is time to find out how much they cost today. Some sources are

  • friends and colleagues living in similar houses
  • online sites where you can search as per location, size and type of houses
  • real estate brokers in that area

Once you have a figure, which will be a range, the next step is deciding the down payment amount. A good plan is to have a down payment of at least 20% of the total closing cost.

Closing cost = Cost of house + brokerage + registration

Let us say this is the house that you have shortlisted:

SMART goal for house purchase.

Source: 99acres.com site

If we add brokerage, stamp-duty, parking, shifting and interiors, the total closing cost could be ₹1 crore. We will take 20% of this value as the target before inflation adjustment.

Related:
Inflation: the impact on your goals and how to choose assets that beat it

Cost after N years = Cost today * (1+Inflation) ^ Time

Here is a table that applies the above rule:

Effect of inflation on goals

For example, at a reasonable 5% inflation for the house, the goal, say five years away will increase by 1.28 times. If the cost today is ₹1 crore, and the down payment is 20%, then the inflation-adjusted target for the goal is

20% * 100 * 1.28 ~= 26 lakhs

Therefore our target corpus in 5 years is 26 lakhs. This amount might look very large today but with disciplined investment, you can reach it.

Related article: Why you should chase your target goal corpus instead of returns?

Achievable: Can you do it? Do you need help?

If you start a SIP of ₹36,000, using the calculator here assuming no starting lump sum investment, and increase the amount you are investing by 5% every year, you should come close to the ₹26 lakhs target for the down payment. This corpus will pay for the down payment while you will pay for the loan from your monthly salary.

If your salary increases by more than 5% a year, you can invest more to reach your goal faster.

The next aspect here is to invest this money in a way which maximises the chances of reaching the target. Given the horizon of the goal, five years, we need to invest in a way that there is a minimal amount of risk.

Realistic: Can you reach this target based on where you are?

Being realistic about your goal means if you can

  • spare the investment amount every month
  • review the investment and the goal value at least once a year
  • keep the priority of the goal fixed

Once you decide how much you need to save, this article will show you where to save: Where to save for the downpayment of a home?

Goals do not exist in isolation. At the very least, retirement is a default goal for most people, since, after all, you cannot take a loan for retirement. If you are investing only for this goal, and not for others, then you are putting those other goals in jeopardy.

Therefore you need to carefully consider all your goals together and then start investing. Here are some case studies to help you do that:

Time-bound: When do you need the money? Is the timing flexible?

We have chosen the year in which the goal is due, i.e. the time horizon, to be five years from now. Two things happen when the horizon changes:

  • further away the goal, the less you need to invest per month for the same amount. Five lakhs in three years requires less investment per month vs targeting five lakhs in 2 years.

Is the timing flexible is the next important question. Goals could be classified as must have, should have and could have. If you are unable to reach this amount within the target horizon, you can consider either buying a cheaper house or investing a bit longer.

Consolidating the result

Question Answer
Specific: Why do you need the money? To buy a house
Measurable: How much money do you need? ₹26 lakhs - 5% inflation, ₹1 crore total cost, 20% down-payment
Achievable: Can you do it? Do you need help? Be able to invest ₹36,000/month; increase that amount by 5%/year
Realistic: Can you reach this target based on where you are? Other goals are not impacted; able to invest in the correct investments
Time-bound: When do you need the money? Is the timing flexible? Five year horizon and flexible

How to invest for this goal?

You can create a Single Date Fund to save for this goal. Please follow the detailed instructions here: How to invest for a single goal using Target Date Funds in India?.

What if you do not have enough downpayment saved?

This article has the plan you can follow in such cases: How to Buy Your Dream Home Without Any Savings: A Step-by-Step Guide

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Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

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This post titled SMART goals: investing step-by-step for buying your dream home first appeared on 07 Sep 2022 at https://arthgyaan.com


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