Why you should define goals before investing?
BLURB: Goals ensure that you remain on track while investing.
How is the idea of getting into your car without knowing where to go? When you want to go to a particular destination at a particular time you can decide when to leave and which vehicle to take. If you stay in Mumbai and want to join your family in Delhi for Diwali, then you will prefer to book your tickets in a plane that will leave for Delhi from Mumbai at least a day before Diwali. Here you know your goal and that helps you take the right action well in advance. The same applies to all our dreams.
Many of us dream but not all of us can achieve our dreams. However, if one has clearly defined the ‘goal’, then the dreams easily be achieved. Let us take an example. Kabir earns Rs 12 lakhsper annum as income from salary, after tax. He wants to buy his dream car – a premium sports utility vehicle (SUV) with a hefty price tag of Rs 25.5 lac. The number makes him think that the SUV will always remain in his dream and he would never get to drive it home.
But it may not be that difficult to own the dream car, if he decides to own it five years from now.
After five years, the car price may touch Rs 35 lakhs taking into account the inflation. But if he invests Rs 45,000 each month for five years & assuming an annual return rate of 10%, he could accumulate Rs 35 lakhs*. If there is a shortfall due to higher car prices or a lower rate of return on his investment, he may go for a car loan. But yes, his targeted investments, technically called ‘goal based investing’ will moreover turn his dream into reality.
The bottom-line is: when we define a dream in a ‘time bound money goal’ it becomes achievable. Goal based investing helps.
Now let us look at what makes a ‘good goal’ for your investments. A goal has to be SMART – Specific, Measurable, Achievable, Realistic and Time bound. Let us apply this matrix to Kabir’s goal and validate if his goal is a SMART one.
Specific – Kabir knows which car to buy – the manufacturer, the model, the variant and the price too. So he is specific in what he wants.
Measurable- He knows the price of the car today and what it is expected to be five years from now. He also knows how much he should be investing at a given rate of return. Kabir can measure it.
Achievable – He can achieve it. He just has to stick to his investment plan. He has regular income that can help him save the required amount of money. Even if he falls short of his target, he can go for a car loan.
Realistic – Many people aspire and buy such SUVs. So he is not asking for moon. Also his expected rate of return of 10% is not a tall order, it can be achieved. If he can invest almost half his income, he is home. Kabir’s goal is absolutely realistic.
Time bound – Yes, he is looking to buy it five years from now.
As all checkboxes are ticked, Kabir’s goal is SMART and can be considered for ‘goal based investing’.
Goal based investing makes your dreams achievable. A SMART goal gives you a meaningful target. You can devise a plan to achieve that target. Once you have a goal and a plan, you just have to stick to your plan and you are there. You can achieve all your dreams – be it a high-end phone, gadgets, car, dream home, overseas vacation or a wealthy retirement; if you take goal based investing route.
There are two options you have.
One: Keep dreaming and do nothing.
Two: Define your goal, devise a plan and start ‘goal based investing’.
Never dream for the sake of dreaming, be the achiever of your dreams.
*Past performance does not guarantee future performance.