Many people take care of their finances by saving money or investing it. However, not all of these people have in mind the purpose behind the money decisions they make. Not understanding the ending goal of investment or saving can result in not making the ideal financial decision. This is when goal-based financial planning becomes a great strategy that you should consider using.
If you wish to make thoughtful decisions when choosing investments and where you are placing your money, this article may come in hand. It will explain what is goal-based financial planning and how to implement this method in your life. On top of that, this article has a list of the best financial advisors in , that can help you create your goal-based financial plan.
What Is Goal-Based Financial Planning?
Goal-based financial planning is a method used to organize one's finances taking into consideration various financial objectives across different time horizons. During the planning process, an individual or family can define their goals. This way, they can prioritize and determine the best way to finance these objectives. To achieve the most optimal plan, they have to take into consideration all tangible and intangible assets and how they interact with each other. This method also allows the person to have more stability in adjusting to life and market volatility.
Some of the common goals people take into consideration when applying this method to their life are retiring at a specific age, buying a house, children’s college, leaving an inheritance, creating an emergency fund, and many others. A goal many people don’t take into consideration is to be able to keep a lifestyle while saving. Of course, the less you spend, the more you save and are able to invest towards a future goal. However, maybe one of your goals is to save while being able to go to the cinema, buying things you like now and then, traveling once a year, and etc.
You can apply this method of financial planning yourself. However, it is usually built with the help of a professional that can create the most optimal financial plan for you. The professionals that offer this type of service are financial advisers, wealth managers, financial consultants, or someone with similar qualifications.
Regardless of if you will hire a professional or apply this method to your finances yourself, it can be interesting to know more about goal-based financial planning beforehand. Thus, this article will give you all the important information you need to know about goal-based financial planning before applying this method to your life.
Understanding Goal-Based Financial Planning
Consider an investor who plans to retire in a year and cannot afford to risk even 10% of his or her portfolio. Let's say the stock price falls 30% in a year and the investor's portfolio falls “only” 20%. The fact that the portfolio has outperformed the market by 10% is of little consolation. To achieve his or her personal target of being able to retire within a year, the investor must concentrate on preserving rather than increasing capital. This is when goal-based financial planning enters as a useful method. If you are only concentrated on the returns, you might take risks you shouldn’t, or commit to a non-liquid investment with money you may need soon. Understanding the goal of an investment can be useful and help you avoid making wise financial decisions.
Goal-based financial planning redefines success by focusing on the objectives of investors. Let’s say someone’s primary objectives are to prepare for retirement and to finance the college education of young grandchildren. The most appropriate approach for the former would be cautious investing. The latter, on the other hand, would demand a more aggressive strategy.
The Benefits of Goal-Based Financial Planning
There are many advantages to using goal-based financial planning in your life. Here are some of the main benefits of this financial method focused on your main objectives:
Better Understanding of Purpose. Goal-based investing is valuable because it helps us understand why we are saving in the first place. Because of the essence of the process, you are encouraged to think thoroughly about your desires, and then articulate. You will have a greater sense of your expectations and ambitions as a result of this. If you are working with a financial advisor, the professional will also understand your and your wishes and needs better, thus creating a better financial plan tailored for you.
Makes the Process More Tangible. Not everyone understands finance. Sometimes you place your money on investments or follow the instructions of your financial advisor, but the whole process is not very clear. With goal-based financial planning, the returns become more tangible, because you will clearly see yourself saving or investing towards a clear goal in your head – a house, a car, a pension, and so on.
Better Asset Alignment with Future Liabilities. Prioritizing goals enables you or the advisor to separate them into distinct pools. Then, each pool can use different risk levels and time horizons to refine the sub-portfolios individually. This will improve the efficiency of your investments. Instead of all being following the same strategy, each investment will be tailored for a specific goal and timeframe. Like this, each decision will be optimal for the goal it is supposed to serve and will be available for when it is supposed to be used.
Reduces Emotional Decision-Making. A clearer sense of your needs gives both you and the advisor a clearer target to work towards. You are less likely to respond to the market’s ups and downs when the goal is defined. Emotional decision-making is lowered as you will be striving for a purpose rather than just chasing returns.
Improves Wealth. Studies have shown that those who save for particular goals do financially better in the long run. Using a goals-based approach to financial planning can raise the average alpha in a portfolio by 1.65% as opposed to simply financing retirement.
How to Apply Goal-Based Financial Planning?
There are a few essential steps to follow when applying goal-based financial planning:
- Setting Goals: You should define all your goals at different stages of your life. Then, estimate how much money you need to accomplish each one of them, taking into consideration inflation.
- Expense Budgeting: Build a budget based on your post-tax income, expenditures (essential and discretionary), assets (bank deposits, mutual funds, etc.), and liabilities (car loans, home loans, etc.). This will allow you to understand how much you can save and spend in a systematic manner toward your financial ambitions.
- Assessing Your Risk Appetite: this is a vital phase in financial planning because you must take the appropriate level of risk to meet your financial objectives. If you take on too much risk, you may lose your hard-earned money at a time when you really need it. If you take on too little risk, you might not be able to achieve your objectives. Your risk tolerance is determined by your age, life stage, target timelines, and financial condition. Often spend in accordance with your risk tolerance.
- Asset Allocation According to Goals and Risk Appetite: Risk and return are linked - higher risk leads to greater long-term returns, and vice versa. Different asset types have different risk factors. Keep in mind that the ideal investment depends on your financial goals and risk appetite.
- Define an Investment Plan: The method of financial planning comes to a close with this step. If you've determined your objectives, risk tolerance, and asset allocation profile, the next step is to figure out how much you'll need to save and spend based on your goal sum, time span, and estimated return on investment based on your asset allocation. You may discover that you need to save more and cut back on certain discretionary expenditures through this phase. If you are unable to save more, do not despair. You can begin by saving what you can. When your salary increases with time, you will be able to save and spend more.
Best Goal-Based Financial Planning Advisors in , .
Creating a goal-based financial plan can be a complex task for some people. Thus, many look for a financial advisor to assist them when applying this method to their life. If you are looking for a financial advisor in , that can offer you goal-based financial planning, there are many in this area. Thus, check below the best goal-based financial planning advisors.