I am suffering from investing inertia because I feel overloaded with so many things to save for. How should I start?
We all have so many competing demands on our finances — save for retirement, save for home renovation, save for the child’s education, save for a holiday, and so on and so forth. In that context, figuring out how much to invest and where can be paralyzing.
The danger is that by focusing on the short-term goals, the long-term goals suffer. A big danger is when your retirement savings are too low. When your investment base is low, the compounding effect of time will also be lower. Then you may end up with an insufficient retirement kitty later life, when it is too late. Of course, the other is also possible. If you focus on retirement and invest for maximum long-term returns, you may fall short when it comes to saving for your child’s education.
Moreover, each goal has a different time frame, hence calls for different investments. You cannot invest the same way for a holiday in 12 months as you would for your child’s education in 12 years.
The key is to define how important different goals are to you and how much you want to put aside for them, based on your current and prospective income.
What matters to you?
When a friend delivered twins, she already had a 3-year-old child. At that time, a car was a necessity for the family of five. For another, a car may be a luxury that they can bypass. What may be a priority for you may not even be a consideration for someone else. Everybody needs to make their own decisions.
How much can you set aside?
Define what percentage of your income you can spare to put into saving and investing without getting in trouble with your daily spending. This amount will add some realism to your goals, and tell you which goals you might have to let go.
If you're realising certain goals may have to go on ice, you may want to look for other income to help you achieve what you want. Just remember that extra income is not necessarily representative of your future earning power. The more likely other future income sources are, the more you can take those into account in achieving your goals.
If you are on the brink of retirement, a salary increase is unlikely, and other income from other work will disappear. That changes your income position downwards, and with it your room for savings.
Why separate goals?
My colleague Himanshu Srivastava tackled this in Ask Morningstar: Separate goals, Separate portfolios. Here is an excerpt.
You need to decide upfront on the target corpus for each goal before you decide how much to invest regularly and where. In the absence of that, you will have no way of figuring out whether your investments are on track.
The best way would be to assign a separate portfolio for each goal, since each have a different time span, which will accordingly have an implication on the risk you can take and the investments to look for. For instance, the money required for your child’s education will most likely be needed before your actual retirement. So, the withdrawal too will happen earlier.
I sincerely request you to read my earlier article A step-by-step guide to achieve your goals in 2022
In Summary
- Write down all your goals. Every single one; the frivolous and the crucial.
- List them in order of importance.
- Give each of them a time frame.
- Decide how much money you can contribute every month to each. You may have to let go of some goals, that is why listing them in order of importance is necessary.
- Be clear on what you are saving for. I know someone who would name their investments. For example: AAA Midcap Mutual Fund (My Retirement), XXX Bank Recurring Deposit (My 2022 holiday), YYY Medium Term Debt Fund (My House Downpayment). This gave clarity and focus and was a great incentive to save.
- Also decide where extra money goes – a monetary gift, a bonus, a tax refund, freelance work payment. Or, you may save money from some regular expenses such as cutting down on eating out. Decide to which goal that money can go.
Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries relating to mutual funds, portfolio planning and personal finance. While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.
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Articles authored by LARISSA FERNAND