One of the most important part of financial planning is setting financial goals. The first step involved is to know where you want to go ?
If you have no goals set , then you will be randomly investing and as your goals in life comes along the way, you fulfill them. It can happen many times that you are not prepared and some important goals is near by, however you didn’t give much thought to it from many years or months and at the end you have to take decisions in hurry, which you don’t want to take.
By setting your financial goals in advance you can get a good idea of what lies in future and start preparation for it (Goal of financial planning)
What is goal setting ?
Goal setting is a process of defining your goals in Life. There are many important and intuitive characteristics of any goal, which makes it SMART . Lets see what those 5 important element of goal setting is .
Specific : Your goals should be specific and not a very general one, It should contain detailed information and should not leave a room for further questions.5 “I want to buy a house” is a very general goal , however “I want to buy a 3 BHK Flat in Karvenagar area in Pune costing around 35 lacs within next 5 yrs” is a more specific goal which gives a clear picture to you . Look at returns from Real Estate in India
Measurable : Your goals should be measurable in terms of “How many” or “How much”. It should not happen that you have a rough idea of the goal. Many people I talk with; say “I want to buy a big house”. It’s a great thing to dream for a big house, but at some point in life you will actually decide the actual size and how many rooms and what will be the area.
Not having a clear view means no idea of how much it will cost and then you can’t save for it properly. “I want to buy a 4 BHK house in 5 yrs” will mean you can exactly find out how much you need to save per month so that you can achieve the goal with higher accuracy, you should be able to track your goal.
That means goal being measurable .
Achievable : This mainly means that your goals should be achievable given your current situation. When financial planners start working with some client, one of the major issues is targeting unrealistic goals in life. Just because you are hiring a financial planner does not mean that he is a magician and will somehow create a strategy for you .
If you are saving Rs 20,000/ month , dont target “3 BHK House in 5 years without loan” as one of the goal because it’s not possible given your current situation. If you put a lot of unattainable goals, the first thing is you will not be able to define how you can achieve them in the first hand.
Relevent : What will happen, if you always wanted to become IAS officer, whereas your goal is “To crack CAT exam” ?
If this happens , you will start with some enthusiasm in start but at some point, it would be tough to sustain the enthusiasm and energy, because that’s not you really wish to and even if you some day achieve that goal which you planned, it would not make sense because it’s not aligned with your life objectives.
This is very much true for financial goals also. You have to make sure your goals are very much what you wish in life .
Lets see some of my personal goals in life .
a) As I like to travel a lot so I would like to generate enough money in next 15-20 yrs , so that I can travel to different countries every 6 months .
b) I would like to build a Farm Land by year 2035, where I can personally do “Vegetable Agriculture”. (I personally have experience of growing things like corn, potato, tomato, carrots, radish, peanuts, cabbage, cauliflower, chana, almost all green vegetables, pulses, peas , onion , garlic) . Yes I have done it in UP at my hometown as a hobby. Do you know hybrid tomato seeds can cost upto Rs 75,000/KG 🙂 so we bought 1 gm 😉 .
c) I would not like to save much for my child marriage, as I would like to encourage them for love marriage and settle things with a simple ceremony , that’s all . I dont believe in lavish marriges anyways .
d) I have no long-term goals of buying house, I would rather like to live in rent for long and build a corpus in pure equity + debt . If things changes and one day I feel real estate is something which should really be part of my portfolio, I will change my mind .
vegSeriously, do you want to buy that 55 lacs flat which is ‘almost’ out of city and commands a rental yield of not even 3% ? Do you ?
Timely : Imagine your goal is like “I would like to buy car of 5 lacs”, Fine ! . Now what do you do ? Do you save 5,000 per month or 20,000 and for how long , It’s important to set a time line so that you have a clear idea of how much does it take to achieve some goal. You can calculate the investment needed for that (See how to calculate) .
Example of Goal setting
Very simple way of doing this is to categorize your goals in Short Term , Mid Term and Long Term and each of them will have “High Priority” and “Low Priority” . This way you have a clear idea of what is important and first preference in all the time frame , For example .
- “I want to buy a Car worth 6 lacs in next 5 yrs, which can accommodate around 5-6 people” can be a High priority , Mid Term goal , where as
- “I would like to take a 2 weeks vacation in Kerela with my family worth 50k , can be a Low priority, Mid term goal .
Let us see the full example of Goal settings
|
|
High Priority
|
Low Priority
|
| Short Term (<3
yrs)
|
|
|
| Mid Term (3-6
yrs)
|
|
|
| Long Term (7+
yrs)
|
|
|
You might want to look at subra’s post on Financial Resolution , it gives a good idea of how you should start and stick to financial goals .
Importance of Goal Setting with an Example
Even though it looks nonsense, you need to understand its importance and its impact. Financial Planning is all about achieving goals in the best possible manner by considering your current situation. If you do not have a goal set with some target amount and target date, then you don’t have a clear idea of reaching there.
Imagine a goal of “Child Education” which costs Rs 10 lacs in today’s value. If your target date is after 25 yrs, then considering a 10% education inflation (historically it stands at 10%), the target amount will be 1.08 crores { 10 X (1 + 10% ) ^ 25 }. Now lets take 3 scenarios with return assumption of 12% per annum .
1) You plan for it and start saving for next 25 yrs
In this case , you will have to save Rs 5,710 per month for next 25 yrs . So you can start an SIP today and consistently start investing for this goal . If you get 12% over long-term , and you do not deviate from your goal and consistently invest with discipline , you can reach the target .
2) You plan for it and save more in the starting years
In this case , lets assume you can save more money in the starting 10 yrs and then do leave your money to grow for next 15 yrs , then you just need to save 7,800 per month for next 10 yrs and then leave the money to grow for next 15 yrs .
3) You do not plan for it and start saving at later point
Incase you do not plan for it and lose the starting years of your earning life and once your child is 9-10 yrs old (suppose you lose 10 yrs) and then you start thinking about the higher education , then to meet the same goal you need to save 21,500 per month for next 15 yrs .
Learning
The most important learning we should take from this article is that planning for a goal gives a direction and enables us to start thinking in that direction. We spread out the effort of achieving that goal in different stages, rather than struggling at the end when that goal is near .
Comments , share your thoughts on setting financial goals , what are the problems in real life which does not encourage us for setting the goals in this manner , Is it realistic ?