Staggering of goals

Sometimes a client wants something the money will not stretch to. Not ever, but not yet.

The first instinct is to say no. The workbook offers a better answer. Move the date.

It calls this staggering the timing of certain goals. Some goals get deferred so that the critical ones are not compromised.

The example is a house. A person wants to buy within the next year. That needs a down payment of Rs 20 lakh and an EMI of Rs 30,000 a month. The current income cannot carry it.

Instead of cancelling the goal, push it back. If the purchase happens after 3 years rather than 1, there is a good chance the money will be in place by then.

Not every goal can move. A child's education has to happen at the normal age. Those goals are fixed, and the flexible ones have to bend around them.

Staggering is also about the goals nobody lists. Around the time the family buys the house, the annual holiday may need to be shorter or cheaper.

The rule (section 1.3.1). The financial situation of an individual may not allow all the financial goals to be provided for. Some goals may have to be deferred to ensure that the critical financial goals are not compromised. There are situations when it is not possible to achieve a goal in a specific time period.

The workbook's own case. A person wants to buy a house within the next year. That would require a down payment of Rs 20 lakh plus an EMI of Rs 30,000 a month. The current income situation is not able to support it. Instead of cancelling the goal, push it back by some time, which will enable the individual to get the required finances in order. Instead of 1 year, if the goal is sought to be achieved after 3 years, there is a good chance that the desired financial position will be achieved by then.

Three things bend with the date, not just the date.

1. Nearby discretionary goals. Around the time the family proposes to buy the house, the annual holiday may need to be reviewed — shorter, or at a less expensive location.
2. Goals that cannot move. Some goals must be fulfilled within a specified time frame. The workbook's example is a child's education, which has to happen as per the normal age and progression. These set the boundaries inside which everything else is staggered.
3. Debt as a bridge. Prudent use of debt in the form of loans can be used to tide over any shortage of funds.

Why deferral works arithmetically. It buys two things at once: more months of saving, and more months of compounding on what is already saved. The workbook makes the same point in reverse when it warns that delay in saving for long-term goals affects the final corpus, because it loses the longer saving and earning benefits including that of compounding. Staggering uses that mechanism deliberately instead of suffering it by accident.

A caution the workbook attaches. Long-term goals such as retirement often get lower priority because they have time on their side, while urgent short-term goals take a higher claim on savings. That is acceptable for short-term goals that are also important, such as a house down payment — but the workbook says it may not be right to prioritise consumption goals, such as holidays and large purchases, over long-term important goals. So staggering is not a licence to keep deferring retirement.

Take the workbook's own numbers and finish the arithmetic.

Mr Iyer wants a house next year. He needs Rs 20,00,000 of down payment and can expect an EMI of Rs 30,000 a month. He has Rs 6,00,000 saved and a surplus of Rs 35,000 a month.

The 1-year plan fails twice over. In 12 months he can add Rs 4,20,000 to his Rs 6,00,000, reaching about Rs 10,20,000 — a shortfall of Rs 9,80,000 on the down payment alone. And an EMI of Rs 30,000 out of a Rs 35,000 surplus leaves him Rs 5,000 a month for everything unexpected.

Stagger it to 3 years. Assume 8% a year on a conservative debt fund, because the money is needed on a date.

The Rs 20,00,000 down payment is covered, with Rs 1,74,000 over. Nothing was cancelled. The date moved.

Now the part that is easy to miss. By year 3 his income has risen, assume to a surplus of Rs 46,000 a month. The same Rs 30,000 EMI is now 65% of his surplus rather than 86%. Staggering did not only fund the down payment; it also made the loan bearable.

And the goal that would not move. His daughter enters college in year 6 and needs Rs 18,00,000. That date is fixed by her age, not by his balance sheet. Had he bought the house in year 1 with a stretched EMI, the education goal would have been funded out of whatever was left. Staggering the house protected the goal that could not be staggered — which is the workbook's whole reason for the technique.

He also shortens the family holiday in year 3, as the workbook suggests, saving Rs 80,000 that goes to the down payment.

Chapter 1 (Introduction to Personal Financial Planning), section 1.3.1, under the bullet Staggering the timing of certain goals, which follows the bullet on focusing on important goals. Expect a scenario question: a client cannot fund a goal in the stated period, and the right answer is to defer it rather than abandon it. A second form asks which goals cannot be staggered, where the answer is those tied to a fixed timetable such as a child's education. The Rs 20 lakh and Rs 30,000 figures are the workbook's own and may appear verbatim.

• Staggering defers a goal; it does not cancel one. The workbook explicitly offers it as the alternative to cancelling.
• Education cannot be staggered. It has to happen as per the normal age and progression. Retirement can be deferred in principle, but the workbook warns against deprioritising it.
• The workbook's figures are Rs 20 lakh of down payment and Rs 30,000 of EMI, over 1 year moved to 3. Learn them as printed.
• Consumption goals should not outrank long-term important goals. Holidays and large purchases are the workbook's named examples of what not to prioritise.
• Deferring costs nothing and gains twice — more months of saving and more months of compounding. Deferring the savings for a goal, rather than the goal itself, does the opposite and shrinks the corpus.
• Loans are a bridge, not the plan. The workbook permits prudent use of debt to tide over a shortage, in the same breath as staggering.
• Do not confuse staggering with prioritising. Prioritising ranks goals against each other; staggering moves a date so a lower-priority goal survives at all.