Separate financial goals: A combined savings pool, or individual pools for each goal?

Our friend, Chanchal Kumar, has many things he wants to achieve in life – buy a home in three years, pay for the foreign education of his two children and save for a comfortable retirement. He has done some reading and started saving for his retirement using a well-diversified portfolio. For buying a house, he has kept aside Rs 9 lakh in a bank fixed deposit. And now to save for his children’s education, he is thinking of buying some safe investments since he does not want to take a risk with his children’s future. Does his plan sound right to you?

This is a common style of planning for many people. They create separate savings pools for each of their goals. If they are sophisticated or advised by a good financial advisor, then each of the pools will have proper asset allocation to meet the specific goal it has for itself. Is that the best approach?

The benefit of separate savings pools is that there is a sense of clarity. Each pool represents your efforts towards a specific goal. The emotional motivation is stronger as each of the goals is real and meaningful to you.

The downsides are many more. When you separate your savings...

Read more