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What is Goal-based financial planning?

Nikhila Sastry

20 Nov 2022



When it comes to approaching money matters, many of us tend to veer into one of two camps: Either we are very frugal and cautious, or we are risk-takers who like to gamble and take risks with our money.

Financial planning is a broad umbrella that covers a wide range of activities, services and advice. It’s not just about ensuring you have enough money in the bank for retirement; there are lots of considerations when it comes to how you manage your money and grow your savings.

Goal-based financial planning takes into account everything from your aspirations in life to the probability that you might need your money sooner rather than later.

There are many different types of financial planning out there: asset allocation, estate planning, risk analysis, retirement planning etc.

Goal-based financial planning is an approach that focuses on identifying your goals first so that the rest of the advice is tailored towards achieving them. It’s also known as milestone planning because it centres around specific life goals such as buying a home or retiring early.

Decide on your goals

Every journey starts with a single step and the same goes for money. Before you can set up a financial plan and start executing it, it’s important to figure out what you want to achieve with your money. The easiest way to do this is to create a list of goals that you want to accomplish with your money.

It can be anything like paying off your credit card debt, buying a car, travelling the world, building a retirement fund, or anything in between. You should also take into account your cash flow as well as your current financial situation when prioritising these goals. For example, if you’re in debt, it’s best to start by repaying that as soon as possible before saving for something else.

What are your short-term and long-term goals?

Once you’ve listed out your goals, you should then break them down into smaller goals and milestones. This will help you to prioritise them even more and also gives you a clear idea of how long it might take to achieve each one.

For example, if one of your goals is to buy a new car, you should break it down into a couple of milestones as well. Perhaps you need to save enough money to pay off your current car in cash, or you need enough to qualify for a car loan.

How much do you need to achieve these goals?

When setting goals, it’s important to have a ballpark figure in mind. This will help to inform your financial plan and ultimately help you to stay on track. It’s important to be realistic when it comes to setting goals, though.

If you set a goal to save ₹ 50 Crore and retire at the age of 50, that’s very ambitious. However, if you set a goal to save ₹ 5 Lakh a year towards retirement, that’s much more realistic and achievable.

You should also take into account any other expensive items or obligations that you have in life. For example, if you’re in debt, it’s important to make this a priority before saving for something else. It’s important to manage your cash flow and obligations to avoid getting into more debt.

Risk assessment - Are you comfortable with taking risks?

Before putting together a financial plan, we should first assess your risk tolerance when it comes to investing. Whether you’re more cautious or if you’re more of a risk-taker will decide the strategy and portfolio recommendations. Knowing this will help them to tailor their advice to fit your investment strategy.

For example, if you’re a cautious investor, you’re more likely to put your money in conservative investments. This type of strategy will help to minimise risk and maintain a high level of safety. If you’re a risk-taker, you’re likely to put your money in more volatile investments that could generate a higher return. However, these types of investments are also riskier and come with a greater chance of losing money.

What is your risk tolerance when it comes to investing?

You need to know your risk tolerance when it comes to investing. A good financial advisor will ask you to put your money into one of three baskets: cautious, moderate or aggressive. Your investment portfolio will then reflect your risk tolerance.

If you want to remain cautious, you’re likely to put your money into low-risk investments like money market accounts and bonds. If you’re more of a moderate investor, you’re likely to put your money into a balanced blend of both stocks and bonds. If you’re an aggressive investor, you’re likely to put your money into higher-risk investments like stocks.

How much do you currently have?

Before financial advisers can put together a financial plan for you, they need to know how much money you currently have. This will help them to tailor their advice and recommend what type of investment portfolio is best for your situation.

If you currently have a substantial amount of money saved up, you’re likely to get a wide range of investment options. These could include stocks, bonds, and other high-risk investments. However, if you’re just starting out and have a small amount of money saved, you’re likely to get a more conservative investment portfolio. This will help to minimise risk and keep your investment safe.

Bottom line

Money is something that we all need to live our lives and achieve our goals. While it’s important to save and be cautious when it comes to spending, it’s also important to be adventurous and take some risks.

When it comes to financial planning, there is no one-size-fits-all approach. Depending on your situation, you may want to go with a cautious or aggressive investment strategy. Whatever your situation, it’s important to find a financial adviser who can help to put together a personalised financial plan for you. Don't know any financial advisors in your budget? Worry not.

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