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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!!!

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