Invest in goals, not funds — the smarter way to investing
Why investment goals matter, and what kind of investment goals should you have?
There is a short and crisp version of this article at the end of it, if you don’t want to go through the whole thing. :-)
You search for the term “Life Goals” and it has more than 12 million search results on Google. “Investment goals”, on the other hand, does not even reach 5% of that number in search results.
WHAT DOES THIS PROVE?
No, we are not trying to say that people who are investing are investing without a goal or a target in mind. But it is more about the mindset that has been present for years when it comes to the topic of investments. The fund managers and brokers are uncharacteristically vague, the number of options you will find if you try searching for investment options is mindnumbing, the data available on those different options is represented in a complex fashion. The result? We give up and end up investing in whatever the bank, fund manager or broker suggests us to invest in.
The problem? What you just invested in was the option that was the best for the bank or the broker. Which may not necessarily be true for your best interests.
Anyway. We will circle back to that some other time. For now, let us get back to the goals that exist today around the notion of investment. The common goals that we have seen so far are mostly macro level and vague:
- Save for my kids’ education (How much?)
- Save for retirement (How much?)
- Buying a house (Ok… Where? How big? Essentially, how much?)
- Wedding of your children (How much?)
There are two problems here. Let us look at them one by one.
But before I do that, let me tell you a secret about myself.
Okay. I don’t care how corny that gif was, I have been dying to use that ever since I saw it yesterday.
Problem #1. Defining that how much
Goals are great. But without knowing the targets, how will you even know how far off are you? How will you know if your numbers need to be adjusted at a later date? How will you know if and when you need to change your strategy, your game-plan?
The reason I kept on highlighting the ‘how much’ in the previous section was the surprising fact that more than 50% of the people we talked to did not have an answer to it. Sure, they gave us a number — eventually, but it was more with a dismissive attitude; like they thought of the number in that moment. In other words, they hadn’t really thought about it that much. And that is a mistake.
The ‘how much’ matters a lot.
Problem #2. Ignoring everything else
Sure, buying a house costs money. So does having a nice life post-retirement, or your kids’ education. But those are not the only things that cost money, do they?
Every single day in your life requires a certain amount of money. Why don’t we save for them?
If you ask anyone whether they had invested for the paint-job their apartment just received, they would laugh at you. Go ahead, try it.
The weird thing is, that they wouldn’t be wrong in doing so. We have never invested or even thought of as investing in that fashion. The incidental expenses have always come from our savings accounts, and the way we see it — it is a mistake. The biggest problems with the conventional approach of keeping ‘cash for incidentals’ on you?
- You always have more money parked in your savings account than required.
- Once you factor in the inflation against the interest you are getting on your money in the savings account, you are actually losing money by keeping it in your savings account. (And we did not even talk about the taxes you need to pay on the interests)
We can pretty much save for everything.
Let us look at it this way. There would always be some money that you would need to take care of unforeseen, sudden, unplanned expenses. Sure, keep them easily accessible (although, to be fair — that amount can be reduced to a minimum). Then there are the long term financial goals — Saving Rs.15–20L for downpayment on your first home, and the likes. Put aside that money on a longer investment plan — say 3–5 years (based on when you want to go for that expense). But then, there are other expenses.
- You spend around Rs. 50,000 every year in the three months between Durga Puja and New Year.
- You get yourself a new phone every year — Rs. 25,000 to Rs. 60,000 (depending on the model, whether it is an Android or an iPhone etc.)
- You go on a shopping spree every 6 months (onset of Summer, onset of Winter) — Rs. 15,000 to Rs. 20,000 each time
Expenses like this can also be a part of a new bucket of investment. Let’s take a lumpsum figure here. Rs. 1,00,000. This is the amount you need every year for these planned expenses. Save for them.
We are no longer living in the era or the work-environment when investments used to mean PF and PPFs and Life Insurance policies. There are a myriad of opportunities available today. And yet, Life Insurance policies, Mutual Funds and SIPs are all that you hear about. My question is — WHY? Let’s challenge that notion and for our petty expenses, let us start investing small amounts at places that give you:
- the flexibility of investing small amounts every month
- no stress of a lock-in period
- no penalty on pre-mature withdrawals
- fast and easy withdrawal process
There are numerous short term growth funds today that allow a minimum investment of Rs. 5,000, no penalty on withdrawals*, and allow unlimited withdrawals directly to your bank accounts.
By putting aside as little as Rs. 8,000 every month, you would have grown your investment in this bucket to more than Rs. 1,00,000 in a year’s time.
*some have a small fee if withdrawals are made within 7 days of investing, but no penalty after that.
The benefit?
- You are getting more than twice the interest on this money as compared to what your savings account would have yielded. The interest rate is typically 20–30% higher than even what you would get on your FDs (fixed deposits).
- You are free to withdraw money for any expense that comes across. The withdrawals are instantaneous, happen 100% online (no need to visit the bank), and you can withdraw any amount you need.
- Unlike FDs, there is no penalty or hidden charges on these withdrawals.
- You can make multiple withdrawals
- Unlike an FD, you don’t need to make a full withdrawal. Partial withdrawal is possible, and you continue to enjoy the same benefit and interest rates on the money that remains invested.
BUT WHY GOALS? WHY NOT SIMPLY INVEST?
Direction. Focus. Commitment.
Take your pick. Intuitively, we are driven by a goal in our eyesight. Remember the expression “carrot at the end of the stick”? Essentially I am asking you to do the same thing, but to yourself, and for your own benefit.
The goal, as far as we are concerned, is very simple. To save you from the state of cluelessness.
Take the example of playing the guitar. When you pick it up for the first time, do you aim to play like Jimmy Page or Slash from day 1? No, right? Sure, you aspire to get there some day, but you start small. You start with a goal in sight. You want to be able to play that 1 song you love or the song you heard your friend play the other day, or your crush’s favorite song. And then you gradually move up from there. (Or in the case you are playing to impress your crush, you may hang up the spurs as soon as that goal is achieved)
In any case, there is always a goal involved. One that looks close. Close enough that you can taste and smell it, feel it.
When it comes to learning a programming language, the first few lines of anyone has ever coded has always been that annoying “Hello World!”
If progressive and gradual is the approach we follow for everything in our lives, then why is it that when it comes to wealth, we forget everything else and aim for the retirement fund. For the love of God, that is a few decades away, at least.
Save money for the future. Sure. I will never advise you not to do that. But (a) don’t let go of everything else from now to then, and (b) do so in a slow and progressive fashion.
Btw. Even if you are looking to learn the guitar, a sweet electric guitar setup could cost you around Rs. 30,000. You can invest to that amount by putting aside as low as Rs. 500 per week. :-)
THE SHORT AND CRISPY VERSION
#1. Investments do not need to be vague, or long term, or even substantial in size. Any amount of money you put in for growth is an investment.#2. Have goals for your investments. It helps you to maintain a firm grip on your financial health at any time. It also increases liquidity as well as maximise growth.#3. There are investment options where you can achieve more returns and yet maintain almost the kind of liquidity your savings bank account provides. Use them well.#4. Any large incidental expenses that you can foresee — buying an expensive new gadget, getting some new furniture, re-painting the living room, a one-week long trip with your girlfriend — they can all be covered by investing wisely. Helps you save almost 20–25% as compared to what you end up paying your bank in the name of EMIs.
