The process of financial planning begins with identifying your goals. That is exactly where the confusion begins. Most people who want to plan their financial future are not really aware of the logic underlying the setting of financial goals. Here are 6 basic characteristics that will give you an idea of how financial goals need to be set.
Firstly, remember that financial goals are not a just statement of intent. They are targets that you need to move towards. Hence your financial goals should follow the below-mentioned rules if they have to be really effective in helping you meet your long term financial goals.
- Goals may pertain to the short term or the long term. Either ways the time frame of the goal must be clearly defined without any ambiguity.
- Goals must be a statement of intent but they must also be firmly grounded. For example there is no point in setting a goal that you want to grow your corpus 10 times in 5 years. That is not practical.
- Goals must be expressed in financial terms. This is critical. If you have a goal to be happy and prosperous in life, that is just too generic. You need to reduce each and every goal to financial numbers.
- Goals must be phased and lend itself to monitoring. If you have a 20 year goal then that must be broken up into 4 capsules of 5 years each and monitored at each step.
- Goals must be pegged to specific requirements. Don’t set a goal that you need to have a corpus of Rs.2 crore after 25 years. Break up into specific goals like children’s education, marriage, home mortgage, foreign vacation, jewellery etc. The more specific and granular you are, the more likely that your journey towards your financial goals will be smooth and successful.
- Goals must address the four quartets of returns, risk, liquidity and tax efficiency. Your return expectations must be linked to the risk you are willing to take. Ensure that your investments are made in such a way that liquidity is available when you need the same. Taxes can wipe away a chunk of your savings and capital appreciation. Focus closely on tax efficiency.
Setting your financial goals…
Setting and defining your financial goals forms the first step to financial planning. As mentioned earlier, you need to be as granular and specific as possible. While setting goals provide for contingencies and cost escalation. Look at what a foreign MBA used to cost 15 years ago and what it costs today. Assume a sharp increase in price over the next 15 years. You surely do not want to be in for a nasty surprise and end up grossly short of funds when the time to service the goal arises. Don’t be too optimistic when you project your potential income because your income growth is never going to be linear. Make provision for unforeseen expenses when you plan your goals.
Monitoring your financial goals…
This is the most critical step after the goals are set. There are a lot of factors which could result in the need to rework your goals. For example, the cost estimate for the goal may go up due to factors entirely beyond your control. Secondly, circumstances may change and certain goals may become redundant over a period of time. Thirdly, certain goals may shift closer or farther depending on changed circumstances. Regular monitoring of goals is essential to ensure that your financial plan is still congruent with your financial goals.
And finally, don’t forget insurance…
When setting financial goals, we tend to overtly focus on risk, returns, liquidity and tax efficiency. However, the most important building blocks are insurance and managing debt. Remember, if you are not adequately insured or if you have a high debt burden you are likely to fall short on your goals. Ensure that your life is adequately insured through a term plan and medical emergencies are covered through a medical policy. These will ensure that any unforeseen exigencies will not hamper your financial plan or your journey towards your financial goals. Focus on cutting down on high-cost debt like credit cards, personal loans etc which can seriously hamper your financial plan.
The concept of setting financial goals appears to be much simpler than it actually is. In reality it is a very complex process and calls for a detailed analysis of needs and financial constraints. You need to understand the concept of goals, first and foremost, if you really want to make a success of your financial plan.
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