Goal-based investing: Key to smart investing

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“Someone’s sitting in the shade today because someone planted a tree a long time ago,” Warren Buffett said once. And it’s true. When you are young and healthy you do not think much about financial planning. But accumulating wealth takes time, and you are likely to encounter financial challenges along the way. The secret to money management is goal-based investing, which is all about identifying your goals, having a time frame to achieve those goals, and deciding how to invest for each of these goals.

These three principles of goal-based investing will help you steer through the maze of money management and reach your financial goals without much difficulty.

Financial planning is the process of meeting your life goals through proper management of your finances. Each individual needs to determine his or her financial plan that would help achieve his/her objectives.

The question you need to ask is where would you like to see yourself tomorrow. Accordingly, identify what are your goals and define them. Fix a time frame for each of your goals and then you need to address each of these goals by constructing a portfolio and distributing your investments into fixed income, insurance, gold, equities, etc.

However, when you are young and healthy you do not think much about financial planning. You love splurging on that expensive mobile phone and swanky car. And why not, with the easy availability of credit everything seems to be within your reach. However, chasing instant gratification, we often tend to overlook our long term financial goals. Then, as we grow old we start worrying about bigger expenditures such as buying a house, kids education and retirement planning. It is, therefore, important to identify your goals and start investing to achieve those goals.

Having said that, financial planning can never be the same for two individuals. While your priority can be buying a house, the other person may want to go on an Alaska cruise. You might be comfortable investing in equities while others in fixed deposits. Hence, there is no thumb rule that applies to all. One needs to identify financial goals and chart out a plan according to his or her risk profile.

Another important aspect of goal-based investing is the need to review and modify your portfolio. We live in a transitional world, where things keep changing including assumptions relating to our investments. So ask yourself whether you have achieved the returns from your investments that you had anticipated? Is there some better investment opportunity? Has high inflation dented your time frame to reach those financial goals?

Goal-based investing helps you in the proper management of finances. It helps you steer through the maze of money management putting financial goals deftly in your pocket.