TLDR: Setting goals, defining time periods, asset allocation aligned to goals
“What is my goal in life?” - always a question which is part of your inner monologue. Or maybe it is just me facing a mid-life crisis that makes me want to ask this question. But instead of taking this blog post into a spiritual/philosophical bent let us stick with financial goals for now. Maybe there will be a another time for spiritual discussion in the blog as well.
Typical goals that are tied to money could be any number of things. But let us go on a journey of some of the most common ones here.
Buy a house
Buy a car
Save for a special vacation - (an African photo safari is on my bucket list)
Kids wedding (Still an Indian parent)
For each of these goals, I have a set target, time to achieve it and plan around it. Some of these i have already achieved like owning a house, some others are still on this list. I am no “Mr. Perfect planner” , not all of these are clearly flushed out. But I have them all in my master spreadsheet. Who uses spreadsheets these days - “Me Me!!”. I am sure there are 100 different apps that do something like this, but call me old fashioned. I just didn’t want to overcomplicate things and be at the mercy of this one-person-DEV-shop to update and maintain an app well into the next 10 to 20 years.
So what do these have to do with FIRE? One of the fundamental differences between FIRE at 40 vs. retirement at 60 is that most of these goals are still in progress. Unlike those retiring at 60. you will most likely have kids in school or in college and you will need to plan for their future until they become fully independent and functional members of the society. A FIRE retiree will have additional goals over and above the typical retirement goal.
You know where I am going with this right? You not only need to plan for an extended retirement, but also plan for these inflight goals as well.
One interesting article that I had read is that we humans tend to overestimate short term financial needs, but underestimate them over the long term. If you are serious about FIRE, you need to plan around this lizard brain thinking.
Three questions - what, when and how?
Create your goal list - the what part.
Ensure that the goals are time-bound. Define when (the When part) you will need to reach to goal, “5 years. When i turn 50, when my eldest is starting college” whatever be it.
Plot them in a timescale map - be it months, years, decades whichever scale works for you
Try and attach a dollar (Rupee) figure to it, inflation related calculations can be tagged on top later
Align your investments to these goals (the How part)
Sounds simple enough right?
Now that you have created the goal list and plotted them against a timescale, how can you align your investment goals/ portfolio against it? Let me broadly categorise them into the following and provide some view on types of products that can be used to achieve these goals
Near term goals - 3 months to 1 year
Saving for a vacation
Saving up for school fees for your kid(s)
Emergency funds etc.
These funds need to be readily accessible, so keep them in Sweep-in savings accounts or liquid debt funds. Do not invest in equity for these needs.
Short term goals - 1 year to 3 years
Saving for a big vacation
Major home appliances purchases etc.
These funds need not be readily accessible and need to be growing at a steady clip with reduced risk. I would recommend debt based mutual funds for those of you who are conservative. Hybrid funds (60 Debt:40 Equity leaning towards Bluechip) for those who are more aggressive.
Near long term goals - 3 to 8 years
Saving for a home purchase
Kids college fund
These funds have a long duration for growth and they need to provide a good return on investment with medium level risk. I would recommend Balanced funds (40:60 - Debt: Equity) for the conservative. Index funds and large cap funds for those who are more aggressive
Long term goals - greater than 10 years
Traditional retirement or FIRE
Inheritance / legacy
These funds can be allocated in fairly risky assets as they have a very long duration to maturity. I would recommend NIFTY, NIFTY JR ETFs and large cap funds for the conservative. NIFTY MID Cap index and small cap, mid cap mutual funds for the aggressive ones.
Risk tolerance and appetite is different for different people, be clear on where you stand. Check my blog post on Risk for details.
What are your thoughts? Do you have different goals in mind? What about your investment strategy? Leave your comments below.
Happy investing - #MyFatFIRE
Disclaimer : I am not a financial planner or fiduciary. Do not use this as trading/Investment advice. Research and invest at your own risk.
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