Market-first vs goal-first: Financial planning should start with required rate of return

True financial well-being doesn't start by asking what the market can give you. It starts by calculating what you need to get. It begins with the Required Rate of Return.When you create a financial plan that is dependent upon market return expectations, you are essentially creating a home without a solid foundation.

You may look at the Nifty 50 or small-cap index and see a 20% annual gain and think to yourself, “If I invest now, I too will receive a similar gain.”The trap in this approach is hidden. In your quest to get the best possible return, you were led to an unintentional acceptance of the highest possible risk, regardless of whether this is suitable for you or not. You are enslaved by the mood of the market.

You are willing to drive at over 100 km/h just because the car can go that fast, not because you have to.“Required Rate of Return” is not market-linked; it is a personal one. It has nothing to do with what the Sensex did yesterday. Instead, the “Required Rate of Return” is based upon a simple, personalized equation that considers how much money you have saved at present, how much money you need to save to achieve your financial goals in the future, and how much time you have remaining to achieve these goals.Consider a typical scenario.

Assume that you are saving for your child’s higher education, which you estimate will cost ₹50 lakh (adjusted for inflation) in 15 years. You currently have ₹5 lakh invested and can save ₹15,000 a month. If you do the math, you might find that to achieve that ₹50 lakh target, your portfolio needs to grow at a compound annual growth rate (CAGR) of approximately 10% to 11%.This number 11% should be your focus.