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What are your savings for?

Disorganised savings are not as bad as not having savings, but very nearly as bad

What are your savings for?

There are plenty of people who have saved and invested enough but are still struggling to meet the larger financial goals of their lives. There are also far too many people who actually have no idea whether they have saved enough. A lot of the time, the reason is that they were not really investing, but just putting money away in something or the other. This may sound like the most obvious thing in the world, but the real point of investing is not to invest, but to eventually use it.

It then follows that unless you know what the investing is for, it's hard to do in any organised manner, unless the investment itself was made in a way that was appropriate for that expense. You don't have to be able to foresee the future to do that. You just have to make reasonable guesses at the obvious financial goals of your life.

This is a back-to-the-basics question which all of us should get back to fairly enough. What exactly is a financial goal for your investments? It's not something general like 'Make lots of money'. It's something more precise. It involves specific things that you would like to do in the future and plan the finances of each. Only then can we answer questions about the kind of investments we need precisely. Here are some examples: you'll need money for your daughter's higher education after six years. You would like to buy a house roughly ten years from now. You'd want that you should always have Rs 5 lakh available for emergencies. You will be retiring in 18 years and you'd like to maintain your lifestyle afterwards.

Without this kind of clear articulation of needs, it's hard to make good investment choices. Someone could make a random statement like, "I need Rs 1 crore after five years." Suppose you can't invest the sum required to reach that target in five years? Without an exact goal, you can always backtrack. Would 90 lakhs be okay? How about seven years instead of five? How about starting next year instead of now? How about forgetting all about it and buying a new iPhone 12?

But, with a precise goal, such a choice is obvious. If you can't reach a goal, it's generally quite clear that you can't and what you need to do. When the goals are very precise, then the returns you need, and the variability you can afford in each becomes clear.

Most importantly, it also becomes amply clear that each of these goals must have a set of investments that are chosen specifically to meet these goals. In other words, we must have separate portfolios for separate goals. Nowadays, we generally use this word 'portfolio' for all the investments and assets that an individual or a family possesses. This is problematic. It's far more useful to have separate portfolios for separate goals - a set of investments that are meant for one specific financial goal. If you think that's hard to track, then the freely available My Investments on Value Research Online is the perfect tool. Very soon, there will also be an enhanced version of this with Value Research Premium.

This method of separate portfolios is actually quite similar to what many housewives have always done. I had a relative, an old lady who, all her life, had run her family's finances in this way. She had a number of hand-stitched cloth pouches with a drawstring around their necks, like a pyjama. Each one was a separate 'budgetary head'. When her husband would bring home his salary, she would put away the correct amount of money in the vegetables pouch, the milk pouch, the servants pouch, the dhobi pouch and so on. The method worked very well. That's all I'm asking you to do with your savings and investments. A separate financial plan is needed for each goal.