Personal Finance

Saving without a goal

B Venkatesh | Updated on June 16, 2019 Published on June 16, 2019

Invest regardless of whether you have a target or not

Most individuals typically save and invest to achieve a life goal such as buying a house or going on vacation. But what if you do not have a life goal? In this article, we discuss why you should save irrespective of having a life goal or not. We also show how you should set up your portfolio when you are not pursuing any particular goal.

Focussed savings

Goals keep you focussed. Suppose you want to accumulate ₹75 lakh in eight years to make the down-payment for a house. Assuming you invest 60 per cent in equity and 40 per cent in bonds, you know you must save ₹37,400 per month based on an expected post-tax portfolio return of 8.44 per cent. You will accordingly manage your current consumption if meeting the goal is important to you. Alternatively, you may decide to save less and settle for a smaller house.

Also, studies have shown that we tend to accelerate our effort when the goal is in sight. So, you are likely to save more when you are closer to fulfilling your goal of buying a house.

But what if you do not have a goal? You will typically face this problem when you start working. You are single. You may not have the responsibility of financially supporting your parents. With no reason to save, you may spend all your income and lead a luxurious lifestyle.

But this could be a recipe for disaster because you will most likely struggle to cut your spending at a later date when you are forced to save to meet your life goals.

So, your goal when you start working is to save because savings is a habit. And unless you develop the habit at the beginning of your career, you are unlikely to accumulate substantial wealth during your working life.

Some parents recognise this problem. If you have been working for three years or less and already have a mortgage, your parents have, perhaps, forced you to save.

Your equity in the house is your savings. However, savings in the form of real estate is illiquid and may be difficult to manage if your employment requires you to shift your location of work from one city to another.

So, what should you do?

No-goal portfolio

Your goal should be to save at least 20 per cent of your monthly post-tax income. Instead of buying real estate, consider financial assets because they are portable. Your additional goal must be to increase your savings every year in line with your salary hike.

The challenge is to choose investment products. Why? If you have a goal, you also have a time horizon to achieve the goal. And based on the time horizon, you can determine whether an investment is risky. For instance, if you are investing to achieve a goal four years hence, you may want to avoid equity investment; for unrealised losses in initial years may be difficult to recover within a four-year time horizon. If you do not have a goal, you will be tempted to take risky decisions because you know you can extend your time horizon when you have large unrealised losses.

You should, therefore, create a portfolio applying the following rules: First, decide your equity allocation and then invest in an equity mutual fund. Your default choice must be a large-cap index fund unless you have a good reason to buy an active fund.

Second, invest the rest of your monthly savings in a bank recurring deposit for a term that fetches the maximum interest rate. Note that this portfolio will provide you initial capital when you eventually pursue a life goal.

The upshot? Your first goal after you start working is to save.

This habit is important. Life goals will naturally take shape as you age.

The writer is founder of Navera Consulting. Send your feedback to portfolioideas@thehindu.co.in

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