Investments aren’t foolproof. Not only are they market-dependent, but they are also dependent on your own long-term money management. You may not be able to predict rising healthcare or education costs, or even sudden medical emergencies that come with big bills. Essentially, you may find that your investments aren’t growing at the rate you need them to, and you may fall short of your life goal. While bridging the gap may seem like a daunting task, with a little clever money management, you’ll find that your life goal is still achievable. Here’s how.
Understand The Investment Value Gap
The difference between the amount you need to achieve your life goal and the amount you have in your portfolio is called the investment value gap. You should ideally calculate for an investment value gap five years from the end of the time horizon on your life goal.
For example, if your horizon ends in 2030, you should make the calculation no later than 2025. If your life goal is Rs. 1 crore, and you find that you’ve only managed to accumulate Rs. 65 lakhs by 2025, you may have an investment value gap that you need to fix. First and foremost, make sure you’re considering the post-tax return on equity investments and post-tax actual return on bank deposits, since these may help you bridge the gap. Apart from that, read on to see how to tackle your investment value gap.
Prioritise Goals In The Investment Hierarchy
It is important to prioritise goals in your portfolio according to importance. For example, your child’s education portfolio would be more important than say, a vacation portfolio. Additionally, make sure you rank your goals according to term as well—your legacy and retirement portfolios are long-term goals, whereas education, or capital to start a new business would be short-term.
Transfer From Low Priority to High Priority
Now that you’ve prioritised your goals, be prepared to transfer funds from low to high priority goals only. While it may be tempting to bridge the investment gap on a short-term low priority portfolio by transferring money from a long-term high priority portfolio in which there is no investment gap, it is important that you refrain from doing so.
For example, don’t meet the vacation goal by tapping into your retirement savings or investments. You may come to regret it, since you may require the money to bridge the gap on another more important portfolio in the future, or if the high priority portfolio goes through its own downswing in the future.
Salvage Long Term Goals
Long-term goals like legacy funds and retirement portfolios are often the first place you may tap so as to bridge the investment gap on shorter term portfolios. However, it is important that you stay on schedule with long-term portfolios as well, since you may find you have to salvage them from falling short of the life goal one day.
You can look into your legacy portfolio to help your retirement portfolio along. You may also find that reverse mortgaging your house helps supplement your retirement fund. You can adjust the outstanding loan against the eventual sale of the house—thereby offering you the post-retirement income you need without encroaching on any other portfolios.
Let Go Of Low Priority Goals
You need to be prepared to let low priority goals go in the event that you require the funds to bridge the gap on a high priority portfolio, or if the low priority portfolio is in and of itself unable to meet its life goal.
You could either use the money towards another high priority goal—for example, abandon the idea of buying a vacation home and instead put the money in your retirement fund—or you could downsize the goal—say, buy a slightly cheaper car, or go on a low-cost vacation rather than an extravagant one.
In reality, all it takes is a little know-how to bring your money back on track. Make sure you’re aware of all the available options before you take the step that is right for you, and don’t let an investment value gap set you back.
The writer is CEO, BankBazaar.com