It's time to think for goal based planning
Written on Wednesday, February 10, 2016
By Navneet Kumar Dubey
Before you start putting money into the market, ask yourself some questions: What exactly are you saving and investing for? What makes you do the planning? What purpose will it serve? For how long you will stay invested and what will you achieve out of it? Various sets of questions come into mind while you plan to invest. You need to keep things simple and plan for individual financial goals that you want to achieve in frequent time horizons.
Let us understand how Goal Based Financial Planning may turn out successful in our financial planning:
1. It secures your finances: When planning for a long-term financial goal you need to think and re-think about savings, which you need to do for a longer period of time to achieve that goal by thinking of any mishap which can occur during that phase. So planned goals always help you to evaluate your need based insurance planning which you need to take to cover your financial losses if occurred any.
2. Helps in tax planning: While planning for a goal, think about investment solutions which can give you dual advantage of getting good returns & help you in saving tax, where you can save up to 1.5 lakh under section 80C of ITA. There are various options available in ELSS category, PPF, Tax free Bonds, etc. The following can be used for planning a goal having longer time horizon of at least 3 years in the case of ELSS.
3. Helps in managing the cash flow projections: Projecting your future cash flows, illustrates how your long term financial situation is impacted by your current financial behaviors so, in this way, you can make a financial goal. What this boils down to is understand what the future might look like, if you stay as you are today with finances. Cash flow analysis is a key step in measuring the gap between where you want to be and where you are now.
4. Helps in managing your assets and liabilities: Goals make it easier to close the gap between the money you can afford to spend and the money you want to spend. By clearly assigning the assets of today to the liabilities of tomorrow, we ensure that we aren’t going to go into debt or fail at those goals. For example, if you fall short of target or goal, like saving Rs.100000 for a luxury vacation, you have to decide whether to make up the shortfall with credit—or cut back on what you can afford at that point of time. Goals help you in explaining exactly the savings you can do to afford to buy an asset by avoiding debts.
5. Guilt-free spending: Many of us do not plan for the monthly budget because of which we come into the category of a spendthrift. Our expenses exceed our saving and therefore we are not able to plan for a goal. One should always save first & then let your expenses flow. Goals also make it more accurate that you spend only the amount reserved for the goal, rather than scooping out a lump sum from a general savings account.
6. Improves your standard of living: It brings the level of wealth, comfort, material goods and necessities available to certain people who plan according to their financial goals. Every goal, whether it can be buying a house or buying a car adds up to your worth and increases your standard. Every single goal helps you to grow your money, logically in a set pattern with known criteria.
7. Specifies the target achievement: Goal planning is done for a specific time horizon as you are planning to purchase a house after certain years of certain worth which can be in lakhs or crores. Let us take an example, Mr. Kumar wants to buy a flat for himself after 15 years of worth Rs.50lacs, assuming the rate of return at 15% then, he needs to start saving Rs.7000 per month to achieve his desired goal. This helps you attain a measurable amount in the specific time horizon, which means that if you have started planning to buy a house today, you will surely achieve it by the end of the year which you had planned for.
8. Capital appreciation helps to achieve more by saving less: It is better to plan from today, rather than buy things at last moment and pay interest for next 7-10 years. For example, imagine you know you will need cash while buying a new car of worth, let’s say, Rs.5 lac after 5 years, you are not going to finance it (where you pay interest), but rather save up ahead of time. In this case, you only need to save Rs.5500 per month, till 5 years, which means at the end of the 5th year, total invested amount will be Rs.3.3 lakhs & you can easily buy a car of worth 5 lakh by saving 1.7 lakh (assuming ROI at 15%). Isn’t it a good idea? This is how financial goals help you to get more number of things in less money paid. Remember, you can always achieve more returns on investment for a longer period of time as compared to paying interest in terms of EMI’s etc. So, why not to plan it today?