In my discussions with people about their financial goals, I have often been surprised to note that many of them want to put even short term events or regular ones as a goal and want advice on how to invest for these. Now, I can understand if you want to take a family vacation to Europe in 5 years and plan to spend 6 lacs for it. That will definitely qualify as a goal and you may want to specifically invest for it. However, if you are going for an annual vacation every year and spend 50000 on it then having it as a goal for investment is really going overboard. Similarly there are people who want to put their children’s regular school expenses as a goal to be invested for, which makes no sense at all.
Now do not get me wrong – some of these can be fairly high and definitely need to be planned for. However, when you confuse it with short term or long term investments then things can get very convoluted. Cash flow management is very different from investment and these need to be kept separate. All your regular expenditure must be met from your active and passive income that you generate monthly or in different periods. In order to meet these expenditures you may plan your cash management but that is different from investment. Let us see a few examples:-
- You plan to go for a vacation every year and this costs you 50000 Rs on an average. Ideally you should be able to meet it from your funds in the SB account. Even if this expenditure is higher, say 1 lac or so putting aside some money every 1-2 months will get this to happen.
- Your children’s school fees are 20000 Rs every month. This is something you will need to pay out of your salary or business income in a regular manner. Yes, if the fees are taken quarterly then you may need to accumulate it over a period of a few months.
- You are planning to replace your furniture and it will cost you 1 lac in the next 6 months. Here again you put aside some money every month and reach the figure at the desired time.
Which brings me to the real point of this post. Make sure that the real financial goals you need to invest for are both some time away and also significant in terms of the money amount. If your normal lifestyle expenditure is not being met through your regular earning then there is a fundamental problem you need to address. The only two ways there is to either increase your earning capacity or reconcile to a lifestyle that you can afford.
Having said that the best way to meet your goals are not from investments but from your regular income, be it active income or passive income. Let us say that your child is studying in college and you need to pay 2 lacs every 6 months for the fees and other expenses. Most of us would have planned it as a goal and will take money out of earlier investments to meet the goal. While there is nothing wrong in it, a much better way will be to meet it from your regular earning. My daughter is in the final year of her college now and I have paid the fees for her 7 semesters in exactly this way. Now I may have been able to do this due to my income levels etc but even if they were lower, I could have done the same with some planned cash flow management.
What are the advantages of this approach? There are many but a couple of them are significant. Firstly, it creates a match between your current lifestyle and earning so you know where you are financially in terms of your bandwidth. Secondly, it lets your investments grow to the maximum extent possible through having the benefit of real long term. In fact, I am of the opinion that retirement is the only real goal that you need to invest for. Maybe one can add children’s marriage to it but my views on an ostentatious marriage has always been rather lukewarm.
Action points – look at your goals and check if you can meet them through your regular income when the time comes. You may be surprised to see how easy it really is. For example, I have always been able to meet all of my goals through the income that I have generated in the relevant year. The only exception was buying the apartment for which I took a loan. I have never redeemed my investments for meeting a goal so far and hopefully will not need to till I retire.
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