I.D.E.A.S is an acronym that I have coined to easily remember the steps of goal linked investment planning.
Step 1. I – Identify your goals
Step 2. D – Determine time available to achieve your goals
Step 3. E – Estimate the funds needed to achieve your goals
Step 4. A – Assess your risk-taking capacity
Step 5. S – Start Now
I will explain this in detail later on in this article. But first, why is this important?
Our Present Investment Scenario:
Presently, most of us don’t really carefully consider our investment decisions. We also don’t know why we are investing in the first place. We just invest because our neighbourhood friend or relative (usually an insurance agent) suggested a plan to us. Or maybe because there was a tax benefit associated with the investment.
Such emotional or knee-jerk investment decisions are not doing you any good. How about your goals in life? Are your investments enough to finance your goals?
Its time to totally think out your investment strategy and link it to specific goals. So you know when to invest, how much to invest, your expected return and when to exit. It takes almost every uncertainty out of the investment decision.
Now, let me explain to you each of the steps above.
Step 1. (I) – Identify your goals
The very first thing you’ve got to do is to identify your financial goals for which you want to invest money. After identifying the goals, it is always best to list them down in order of priority. That way if you don’t have sufficient funds for all your goals, you know which ones should go first.
If you’re married, ideally this exercise should be done jointly so both of you are aware of your goals as a family. The support of your family on your investment decisions means a lot because it would help you to persist even during the tough times.
Step 2. (D) – Determine time available to achieve your goals
We need to know the time available to realize each of your goals.
For example, if your goal is to save for the higher education of your child. You need this money when your child turns 18. Now supposing your child’s age is 3 years today, you have 15 years to achieve your goal.
Similarly, time available needs to be determined for each of your goals.
Step 3. (E) – Estimate the funds needed to achieve your goals
The next step is to determine how much money is needed to achieve your goal. Inflation needs to be factored into this decision. Continuing the above example, if you are saving for the higher education of your child, consider the present cost. Let’s say, Rs 10 lacs. Next consider the time after which this goal will be actually realized. This has already been determined in Step 2, that is, 15 years.
So the funds needed will be the inflated future value of Rs 10 lacs after 15 years.
If we assume an inflation rate of 7% p.a. this amount will come to 27.59 lacs
Hope you got the idea. That’s how you determine the funds needed for all your goals.
Step 4. (A) – Assess your risk-taking capacity
The next step is to find out how much risk you can afford to take.
We’ll help you with the risk profiling questionnaire where you can understand whether you are an aggressive, moderate or conservative investor. Depending on your ability to take risks, we’ll design an asset allocation plan suited to your risk profile.
All investments need to be aligned with the asset allocation plan. This is a very effective technique to manage risks and get optimum returns.
Step 5. (S) – Start Now
I have listed this as one of the steps because most people understand that they need to save but they procrastinate. And then they end up in either emotional or knee-jerk investment decisions.
Starting immediately gives you the benefit time in the market which will make compounding work in your favor. On the contrary, starting late robs you of precious time and seriously dents your wealth accumulation and consequently your family’s financial goals.
Delay in investing or lack of systematic planning and investing is hurting your family’s financial goals more than you like. So, get up and get started.
We, at Capitalworx are glad to help you through this process. We’ll help you measure your risk appetite, build your financial goals and suggest the proper investment avenues.
Wishing you well.
P.S. If you want help with your financial planning, let me know. Use the form below to send a message. (No charges for you) 🙂