3 Lesser Known Benefits of Goal Based Financial Planning

Recently, we’ve witnessed an increased interest in goal-based investing, over ad-hoc investing. While most of the benefits of goal based financial planning are well documented, here are three lesser known ones that might surprise you.

Optimal Asset Allocation

How, you might ask, can the simple act of planning for your goals lead to the achievement of an optimal allocation between low risk, low return and high risk, high return assets? The reason is simple – when a goal is a long distance away, the monthly saving requirement tends to be smaller. When the quantum of money being committed is small, we tend to be more courageous with respect to our choice of assets. Hence, long term moneys tend to flow into higher risk, higher return asset classes such as equities by default. Take for instance, a saving of Rs. 5,000 per month for a retirement goal that’s 30 years away. Would you not display an above normal proclivity towards more volatile, higher return asset classes to save for this goal? And now, what about a car purchase goal that’s just a year away, and for which you need to stack away Rs. 20,000 per month? Chances are, you’ll veer towards more circumspect debt funds by default. In both cases, you’ll have made the right choice. Got it?

Guilt-Free Spending

What’s the point of toiling hard all month for a pay check, only to be racked with guilt each time you decide to spend a little bit on yourself? Studies have indicated that those with goal based financial plans in place feel a lot less guilt while spending money on themselves. Knowing that your discretionary spends aren’t damaging your retirement years - or your child’s education goal - can be very good for your soul indeed! Putting your goal based savings on auto-pilot will silence that subconscious chatter that’s holding you back from truly enjoying the fruits of your labour. The result? An enhanced happiness quotient and guilt-free spending!

Better Decision Making

If you’ve spent any more than five years as an investor, you probably know by now that you’re your own worst enemy when it comes to making sound investment decisions. Indeed, exploratory studies in behavioural finance are daily uncovering stunning truths with respect to the devastating impact that our own mental fallacies can have on our investment portfolios eventually.

It might surprise you to know that having a goal based financial plan in place (and sticking to it resolutely!) might serve as a silver bullet for most investment-related behavioural problems. Investing with a purpose and with a plan automatically enhances your decision-making skills. You become a more passive, long term investor who benefits from rupee cost averaging and compounding. You don’t get unduly disconcerted by market corrections. You switch off the TV and stop getting harangued by the constant flow of ‘bubblespeak’ or ‘bullspeak’. In other words, goal-based financial planning has the hidden power to transform you from a panic-stricken novice-market-dabbler into a mature, level headed investor.

Have you prepared your goal-based financial plan yet? If not, you’re missing out. Consult a Professional Financial Advisor today!