How to ensure that you meet your financial goals

Kavita and Anil are in their early 40s. Both have been avid investors, and have saved diligently for the education and weddings of their two daughters, as well as other goals like their own retirement, family vacations, and a bigger car. They have invested in various mutual funds, stocks and bank deposits, which seem to be doing well and earning an overall return in the range of 10%. However, of late they have been feeling a little unsure about whether they are doing well enough to be able to meet their financial goals. They’re not quite sure if they have accumulated enough to be able to take that big foreign holiday or buy that luxury car. Is there a way for them to ensure they are able to meet the financial goals that they set?

Anil and Kavita must keep their sights set on their financial goals as they invest. They seem to have the right idea in terms of setting and pursuing certain goals, but tracking their progress is not the way to go about it. The focus on returns is a faulty approach and will tell them nothing about whether their investments are on track.

The only way to judge how their investments have performed would be to wait and see whether or not they are able to meet their goals. What they can do meanwhile, is figure out a system to track and prioritise their goals.

One way to do this is for Kavita and Anil to split up their large portfolio into smaller sets or ‘envelopes’, and assign them to their individual goals—foreign holiday, retirement corpus, daughters’ higher education, luxury car, etc. If funds are needed for an immediate goal, the investment designated for it should be in debt instruments, and if the goal is a distant one, the allocation can remain in growth assets like equity. By tracking the funding each goal, they will know if they have enough stashed away, as they approach the goal.

If Kavita and Anil attach a real outcome to their saving, they will be more likely to actually work towards that goal, rather than investing blindly. Absolute returns or even comparison to a benchmark does not matter, making steady progress towards their goals does. When they save for a tangible outcome, they will be more likely to achieve every one of their financial goals.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)