Skip to main content

Goal Planning Versus Budgeting

Goal planning focusses on long haul projections while budgeting is more “current time”.

Goal planning requires near perfect discipline. Budgeting gives you flexibility.

All these points aside - my biggest gripe with goal planning – never seen anybody do goal planning basis real rate of return. Corpus projections basis nominal rate of return is commonplace. Going for real rate of return is difficult – because one needs to get an approximate idea of his / her personal inflation rate. Figure this – INR 25 Lacs invested for 20 years end up with corpus of:

-            INR 2.41 Cr @ nominal CAGR of 12%. But hey, hold on - there’s a psychological trap in this number – your mind gets tricked into believing you did good because you measure purchasing power of this corpus of INR 2.41 Cr in current price terms

 

-          Now assume your personal inflation rate for next 20 years stands at 6%. After adjusting for inflation, end period corpus comes to just INR 75.19 Lacs. This is what matters, and not INR 2.41 Crs. Though this working never gets done!!!

 

Essentially, goal planning has too many variables over which you mostly have no control. Budgeting gives you full control as it focusses on what you already have and changes can be effected almost immediately, if you want to.

Here’s what I earlier wrote on budgeting.

Before I end this, full disclosure – as a mutual fund distributor, regulations don’t allow me to do any kind of goal planning. Though I recall even as an investment adviser, I did not focus much on goal planning. 

Have a nice weekend!!!

Comments

Post a Comment

Popular posts from this blog

Equity Investing – The Worst Case Scenario, 10 Year Horizon Basis

10 year CAGR for the period 1 April 2010 – 31 March 2020: 6.19%. Covid 19 made equity market tumble and we had to contend with a lowly equity market returns. We can safely say 10 years is long enough investment horizon. Investment return of this quantum will easily qualify as worst case scenario. And it was. If we consider only point to point figure. Here’s what unique to listed equity investing: it is NOT like buying property where you lock in “one” price at a point in time. Then why look at worst case (or even best or average case) on point to point basis? My opinion – to get an idea of real worst case scenario, looking at data on 3 year moving average basis makes better sense. Let’s see what numbers say. Point to point returns of 10 year period ending: -           31 March 2018:                          ...
Post a Comment
Read more

Debt Mutual Funds: Can They Still Provide Better Returns Than Bank Deposits or Direct Bond Holdings?

Now that you are done with quickly deploying money in debt mutual funds in last few days of FY 2022 - 2023 to take advantage of indexation benefits which stand withdrawn from 1 st April 2023 onwards, what would you do with any money coming your way which you do not want to put in growth (risk) investments like equities? If you go by news, the money would move back to bank deposits now that fixed income investment area has been tax-levelled. We’ll see in a while what numbers say. Though for me, bank deposits beyond the insurance amount are a strict no. That said buying GILTS from RBI Retail Direct portal does deserve a serious thought now. But first let’s look at some subjective benefits of keeping money in bond funds. I could think of two: -           Liquidity. Bond funds are very liquid, while I cannot say for sure whether direct government bonds will be that liquid as I have never sold a GSEC in secondary market. In fact, not bough...
Post a Comment
Read more

Asset Inventory & Investment Success

You don’t know how well your money is doing until you have a clear picture where all your money is. That is where the role of periodically working out asset inventory comes into play. While it may appear to be a chore initially (and it is), if one perseveres, the results may be the best guide a very successful financial situation. The best part – you don’t need any fancy apps or other tools to go about it. Simple excel sheet or even a diary if you prefer writing can do the job near perfectly. I am deliberately not putting up any sample asset inventory format. That is left to each individual. The format you go by can be a simple one, with just the asset type & associated number against it. Or an advanced one where you also plug in realistic expected return. Maybe even a super advanced one (if I can say that), where you adjust the weighted average portfolio returns with expected inflation to get an idea how well your investments are keeping up with purchasing power capacity. Wh...
Post a Comment
Read more