As an individual with family and responsibilities, you will naturally have many financial goals that need some regular investments.
If you earn high enough to invest properly for all of these goals, then there is nothing like it. But what to do when the surplus from income is not enough for all the goals? You may plan on switching jobs to earn more and try to cut your expenses. But both these are easier said than done.
So, what should you do in such a situation?
Let’s take an example and it will better help understand what one needs to do.
Suppose you are a 35-year old sole earner of the family (who earns ₹1.50 lakh monthly) that has a wife and two children aged 7 and 3 years. You live in rented accommodation currently. Your goals are simple – a house, proper higher education for both children, and retirement savings.
Let’s say you did some financial planning maths (or an investment advisor did it for you) and found that you need to invest the following monthly amounts for all your goals:
- 7-year old daughter’s higher education - ₹15,000 per month
- 3-year old son’s education - ₹10,000 per month
- House down payment - ₹35,000 per month
- Own Retirement - ₹25,000 per month
- Land for retirement house - ₹20,000 per month
This totals a monthly investment requirement of ₹1,05,000 if you want to invest simultaneously for all the goals.
Now your monthly income is ₹1.50 lakh. And your regular expenses are about ₹80,000. That leaves a surplus of ₹70,000 per month. But to invest enough for all the goals, the monthly requirement is ₹1.05 lakh.
The immediate reaction might be to try and reduce expenses. The next thought might be to earn more. Or better still, do both. But as I said earlier, these things are easier said than done and anyways, don’t materialise overnight.
Another possible thought is that what if one invests what is available in instruments that give very high returns? That might compensate for a lower investment amount. This is true theoretically. And it might seem glamorous. But it’s not easy. Getting 7-8% from debt and 10-12% from equity is feasible. But if you want to get 18-20% regularly for several years, then it is not easy. You might have to take risks which if backfire, can lead you to financial ruin and lots of losses.
So don’t depend on getting very high returns by taking unnecessarily large risks. I know this sounds boring but that is the truth and the right thing to do.
You don’t drive on a highway at 180 mph just because your car speedometer shows that as the upper limit. You need to assess traffic, road quality, car condition and most importantly, your own fast driving skills.
Coming back, here is what you can do in such a situation.
- Are all the goals equally important? Not at all. Some are non-negotiable. Like children’s education. House purchase is important but a bit flexible. Same for retirement. But land plot purchase is not a critical goal at all. So, you can easily skip this one initially till you start funding at least all the other important goals.
- Since the surplus available is limited and you have several goals competing for it, better to reduce your goal budget for at least 1-2 goals. Say you were targeting ₹50 lakh each for both children initially. Maybe start with ₹35 lakh each and invest accordingly. Later on, when your income increases, you can once again retarget a bigger amount. So at least initially, some goals can be started with a lower investment amount.
- Now the obvious one - over the next few years, try to work towards increasing the income and also ensuring that expenses don’t increase at the same pace.
That is how you need to rationalise your financial goals and budgets if the current surplus doesn’t allow you to invest fully for all the goals.
And if you have trouble finding out how much you need to invest for all the goals, then you should talk with a financial planner who can help create a goal-based financial plan for you.
Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.