Three Bracket Approach for Short and Long-Term Financial Goals

Many individuals have various financial goals, some short-term and others long-term. These goals can range from buying a house or a car, saving for children's education, or building a retirement fund. Some of these goals are short-lived, while others are more extended. In addition to these planned expenses, unforeseen financial emergencies may also arise, which need to be accounted for.

How does the Three-Bracket Approach work?

To fulfill all your financial goals, it's advisable to allocate a minimum of 20% to 30% of your monthly income to savings. This is a prudent strategy to ensure financial stability in the face of market volatility. Through a combination of short, medium, and long-term investments, you can effectively manage your financial resources according to different financial objectives.

1. Security or Short-term Bracket:

This bracket is intended for your immediate financial needs and short-term financial goals. Allocate a portion of your monthly income, typically around 5%, into a high-liquidity fund. This fund acts as a financial safety net, ensuring you have sufficient funds readily available for unforeseen expenses. You should continue this allocation until you have saved an amount equivalent to your one-year expenses. Afterward, you can consider shifting half of this fund into your medium or long-term brackets while maintaining a 5% emergency fund. This fund can be utilized for any unexpected financial emergencies.

2. Medium-term Bracket:

The medium-term bracket spans from three to five years and covers financial goals for this period. Allocate a portion of your monthly income, around 5% to 7%, into short-term debt funds or fixed deposits to address these goals effectively.

3. Long-term Bracket:

The long-term bracket is designed for goals beyond five years and into the future. To cater to this bracket, invest a significant portion of your monthly income, say 10% to 15%, into diversified equity funds. You can choose from a mix of active and passive funds, diversifying across various asset classes. If you prefer active funds, consider a mix of 3-5 well-performing funds. On the other hand, if you opt for passive funds, consider a combination of Nifty 50 Index Fund and Nifty Midcap 150 Fund in equal proportions.

One-Time Windfalls:

If you receive a lump sum amount through bonuses, ESOPs, or other sources, consider allocating 40% of this windfall into the long-term bracket, 10% in medium term bracket. This can provide substantial assistance in achieving your long-term financial goals.

Conclusion

In conclusion, the Three-Bracket Approach helps you efficiently allocate your financial resources to meet your short, medium, and long-term financial objectives. By adhering to this strategy and making informed investment choices, you can enhance your financial stability and work towards a secure financial future. Always remember that financial planning should be tailored to your specific circumstances and goals. Consult a financial advisor for personalized advice and guidance.