Exercise a plan,score the goal

Considering that one may have many goals,as an example,let us talk about three goals that need to planned. Down payment for a vehicle in two years,providing for interior decoration of your house in five years and planning for your childs wedding in 12 years.

For a good goal plan,the amounts for these goals need to be defined now and a projection must be made. Such projection would be based on timeframe available for determining the future value of these goals by taking into consideration inflation pertinent to that goal in question. For example,if you propose that you child should study in Australia perhaps you would be better off looking at the Australian rate of inflation rather than the Indian rate of inflation.

The Workings

Now,as you can see,that the time frame for each goal is different and planning would depend on your existing assets,monthly cashflow available and the time that you have for achieving your goals. The time frame would be your starting point and that coupled with your cashflow would dictate the rate of return that you need to earn on the goal in question. Further,the rate of return would dictate the asset allocation i.e. how much money into risk instruments and how much into non-risk instruments and this then culminates to your risk profile for a goal in question. This is where asset allocation comes in merely as a tactical tool. Once again,I want to remind readers that asset allocation is just a tool and not a strategy as it us purported to be.

From the goals mentioned above,if the goal is two years away perhaps the strategy for goal fulfilment would be biased toward low risk instruments typically generating lesser rate of return but then the contribution from your end would be much larger here. Against this the goal that is 12 years away,perhaps the strategy for goal fulfilment would be biased toward high to very high risk instruments typically generating a much higher rate of return and then the contribution from your end would be much larger lower. That is how you can balance your cashflows so that from what you have you are able to achieve all of your goals.

Risk Management

From the above you can see that the risk profile is different for each goal. Against this backdrop how could you possibly have a single risk tolerance framework? The purpose of planning is defeated if you choose a generic level of risk.

Once the goal planning is done and you feel that the level of risk is high you have three choices. To take lower risk you will have to have an increase in your cashflow and that may not be possible as you suddenly cannot increase your income or change your job. The next is to extend the time frame but then that is again not necessarily possible with all goals. For example,you cannot say that your child will go to college about five years later when you have more cash. The third is you will have to compromise on the quantum of the goal but if you had to do that why would you do financial planning in the first case?

The Summary

Remember different goals have a different rate of return and hence they would earn different rates of return. A generic risk level and thereby buying some products would just not help. It would do more harm in the long run and at that time there is a chance that you have to do firefighting to provide for the money,there is stress,assets have to be liquidated,some assets just cannot be liquidated as the maturity date is still away and in general the financial situation becomes a complete mess.

Like I said,goal planning gives you adequate control of your finances and provides a lifetime of peace. If you are not at ease with your finances,surely you dont have goal planning or that the goal planning you have is just not effective.

Author is Director,Transcend Consulting

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