How to set your financial goals?     (12-Aug-2014 )

"By failing to prepare, you are preparing to fail" - Benjamin Franklin (a well-known polymath, politician, writer and scientist).

We all have some wishes and responsibilities in life. For instance, you might want to go on a holiday, make sure your child attends one of the best colleges in the city or buy a car. To achieve these ambitions, it is extremely important that you have a plan. Just like a student needs to prepare and study well if he wishes to score good marks in a test, you as an individual also need to plan and set your financial goals in order to fulfill your dreams in life. You see, setting goals, is the first step towards achieving them. If you go wrong here, there are slim chances that you would be able to fulfill your wishes on time.

Hence, for your benefit, PersonalFN has listed down certain points which must be borne in mind while setting your financial goals:

  • Include your spouse while making goals

    You must ensure that you also include your spouse, irrespective of the fact whether she / he is earning or not, while making a list of all the goals which you want to achieve. This is because your spouse might have a lot of inputs which could change the characteristics of your financial goal. For instance, she might be more aware about the academic subjects that your child is inclined towards and the course which he / she is likely to pursue. This might help you while planning for your little one’s future. Also, it is better to have common goals regarding plenty of things such as the family’s dream holiday, buying a new house and so on. Moreover, including family members while setting goals, will avoid conflicts of interest and disagreements within the family in the long run.

  • Make realistic goals

    You might want to travel across the world, live in the most luxurious hotels, buy the most expensive clothes and accessories, and drive your own new sports car and so on. However, these things become a reality only for a handful few people. Hence, it is imperative to let your list of financial goals be realistic. If you set up financial goals that are basically a list of all your heart's desires, you might be disappointed if things don't seem achievable. Although, you must push yourself a little bit to get that extra edge and realise your true potential, it is also important to know your capabilities and not discourage yourself.

  • Set specific goals

    One of the most important points to be kept in mind while setting financial goals is that they should be extremely specific. You must know for whom you are making the goal (for example for yourself or your children), what do you want to achieve, when will the goal occur (say after 5 or 10 years), what is the purpose of the goal, what are the requirements and constraints and so on. Any vagueness while setting a financial goal could become an obstacle when you go out to achieve them.

    Attach an approximate value to each of your goal so as to understand how much you need to save every month. It is necessary to take into account and assume a realistic inflation rate and rate of return while determining the cost of your goals. This is extremely important as the inflation bug eats into our hard earned savings every day. For instance, a business school charges Rs 25 lakh today and your child will likely attend in 5 years from now; with 8% annual inflation, the fees you will end up paying would be Rs 36.73 lakh after 5 years. That’s a big difference, and if you planned as per today’s estimate then after 5 years you would be running from pillar to post to arrange for the differential amount or would not be able to send your child for post graduate studies.

  • Prioritise your goals

    It is important to rank your goals in order of importance. This is because only then will you realise the urgency of some goals and meet them on time. For instance, the need for getting an insurance policy is more important than going for a vacation. Also, paying the school fees of your child for the next semester is more important than saving for the latest mobile phone. Goals could be short term (within 2 years), medium term (3 – 5 years) and long term (5 years +). Remember that, while prioritising them, it is also imperative to keep in mind the time horizon remaining for the goal. It will also be prudent to put all the goals along with their specific details and priority down on paper so that you remember all the details. Moreover, having everything in black and white will discourage you to use the money set aside for a particular high priority goal for any other less important things.

  • Start early

    There might be certain goals which won’t show up in your life for quite some time such as your retirement or your child’s marriage etc., so you might think that why should you plan for and set goals which are a long time away. However, remember that setting goals in advance can give you a precious gift – "time". The longer the time you have before the goal turns up for fulfillment, the lesser you will need to save each month and more you can gain from the compounding effect.

Once you have finished setting up all your financial goals, you shouldn’t waste time and start investing regularly. Before you invest, chalk out an asset allocation plan. You should then carefully choose suitable investment avenues. Time left in achieving a particular goal and your risk appetite would largely decide how your asset allocation would look like.

PersonalFN is of the view that financial goals, once constructed, are like a road map for the achievement of your objectives. They make your aspirations take shape and become achievable. You must review your financial goals periodically to include any changes that are happening in life.

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