Top 3 benefits of goal-based financial planning
Goal-based financial planning is one of the best ways of channelising your investments and reducing your overall investment risk. However, many are still far from understanding the benefits of goal-based financial planning. In this article, we have listed a few of the lesser-known benefits of goal-based financial planning.
Appropriate asset allocation
Asset allocation can prove to be one of the most complex activities. This is because it is not just about deciding the right proportion that needs to be put into various asset classes but also, rigorous monitoring of such proportions along with changing those proportions from time to time.
It has been observed that life is simpler for those who have a goal-based financial plan. Having a goal-based plan helps you to understand the priority, requirement, and time horizon of individual financial goals. Once you have this in place, asset allocation becomes quite easy.
Say, for instance, you have a financial goal of educating your child, which is 15 years away from today and you are a moderate risk-taker. Now, here, we can safely consider that your investment horizon is 15 years, which is pretty much long-term. Hence, we can suggest having 60 per cent in equity for the assumed risk profile and 40 per cent in debt. Besides, we advised allocating lower for equity even though the goal is long-term because a child’s education is a need and not a want. Hence, its portfolio would be your core portfolio and not the satellite one.
Many people get confused between a financial plan and an investment plan, as most of them consider both as one and the same. However, that’s not true. In fact, an investment plan is just a part of the financial plan. Moreover, having goal-based financial planning helps you to spend responsibly. This means that you have made adequate provisions for your important financial goals. Hence, you can take a bit of liberty to spend a percentage of the amount as per your wish. Moreover, this inculcates the habit of responsible spending as any additional cash flow would always make you think whether splurging is at all important than fulfilling your financial goals.
Better decision making
As an investor, the most dangerous thing to carry is behavioural bias, which often leads you to take inappropriate decisions thereby, leading to an awful investment experience. However, having a goal-based financial plan and investment strategy often helps you remain focused on your financial goals, which would most likely refrain you from making wrong investment decisions. Therefore, having a goal-based financial plan is one of the most prudent decisions that one can make about their financial life.