Many times, our monthly savings fall short of what we need to save to meet our future consumption needs. That forces us to prioritise our life goals.

So what are the factors that you should consider? How should you prioritise? Prioritising goals

You should consider two factors. The first is time horizon or when you want to achieve your goal. The second is the possibility of postponing the goal to a later date. Now, there are issues if you prioritise your goal based only on time. You may be unable to achieve those goals that cannot be postponed, but which have longer time horizon.

Here’s an example. You wish to go on an exotic vacation three years hence and save for tuition expenses when your child enters college 10 years hence.

Based on what is imminent, your vacation will take priority over your child’s college tuition. But, of course, you would like to save for your child’s education first. But what if the choice is not so obvious?

For instance, what if you have to choose between buying a house five years hence and saving for your daughter’s marriage 12 years hence?

You should prioritise your goals based on importance too. A goal that can be postponed should not be top priority.

Some of your life goals are child’s education, care-giving for elderly parents, marriage expenses for son and daughter, buying a house, retirement savings and vacation.

How should you set up your investment process after you prioritise your life goals? You should protect your family’s current standard of living before you strive to improve it. So, create an emergency fund first. Next, set aside money to pay for life insurance premiums every year. Then, pursue your top three life goals.

Managing the gap Suppose your monthly savings requirement is ₹25,000 for your child’s education; ₹35,000 towards down payment for a house and ₹20,000 for an exotic vacation.

If you can save only ₹50,000 a month, you do not have to allocate ₹20,000 towards education, use the rest for home account and give up your vacation goal. Instead, you can allocate your money in such a way that the gap ratio is 2:3:5. In the example above, the total gap is ₹30,000 a month.

Based on this gap ratio, for instance, a gap of ₹6,000 will be borne by the education account. So, allocate ₹19,000 of your savings towards education; ₹26,000 for home and ₹5,000 towards vacation.

This strategy is based on the following rationale: Your income could increase significantly in the coming years.

You may then be comfortably placed to contribute capital to all three investment accounts. Starting with small contributions today and increasing savings substantially in the future can still help you achieve your goals. Besides, the regret of not pursuing a life goal is more than pursuing one and failing to achieve it due to lack of savings or poor investment performance.

Your priorities may change as you age and as your family circumstances change. You should adjust your investment process accordingly.

For instance, you may have assigned top priority for your child’s college education. If your child secures full scholarship, you can use the education money to fund a new life goal or fill gaps in your existing investment accounts. If there is a gap in your top priority investment accounts, transfer money from the least priority goal to the top one.

(The writer is the founder of Navera Consulting. Feedback may be sent to >portfolioideas@thehindu.co.in )

Related Topics