What do we understand by goals in world of finance? The most basic requirement of goals in the financial world is that it must be measurable. Unless your goals are measurable, you cannot plan for those goals. And unless you know where you need to reach, it does not matter how fast you run.
Once you have crystallized your dreams, the next step is put a number to it. For example, you may require Rs.5 crore for your retirement, Rs.1 crore for your child’s education etc. Once the monetary value is imputed to your goals, the next step is to work backwards and plan how to reach that goal. You need to work out an investment plan in such a way that the outflows sync with your inflows yet enables you to generate huge wealth over time. But for that you need to know what figure you need to reach after a certain number of years.
What is goal setting all about?
Goal setting is essentially a 4 step process that needs to be followed.
- First put down your dreams on paper. For example, you want to lead a comfortable retired life, you want to take your spouse on an Alaskan adventure, you want to send your daughter to an Ivy League school etc. This is the first step.
- Once the dreams are laid out on paper, you must discuss and lock these dreams. Then you need to put a financial value to it. You obviously, do now know the costs 25 years down the line, so you can use your current costs as a benchmark.
- Once the current costs are worked out, the next step is to inflation the costs to the future. Your parents must have run the house on a much smaller budget but obviously costs have gone up along the way. You need to apply different rates of inflation to different items. For example, education costs cannot be inflated at the same rate as your monthly household budget.
- Once you arrive at an indicative figure for your long term goals, you need to do the final step of ratifying these numbers. Talk to your financial advisor, talk to someone senior who has seen costs over the years or talk to some academicians for serious inputs. Once the ratification is done, you are ready to go with your goals.
Why must you set your goals right at the beginning?
Setting you goals alone is not enough. You also need to have a watertight plan to achieve these goals. So, it is not just about planning your work but also about working your plan in this case. The earlier you start the process of goal setting, the better off you will be. Remember, your goal setting will be driven by returns, risk and liquidity. At a young age your risk appetite will be the highest, your liquidity needs will be the lowest and therefore your returns will be the highest. Here are 5 reasons for you to start setting your goals early and right at the very beginning.
- When you set goals and crystallize the monetary value of these goals at the initial stage, it gives a sense of purpose and direction to your entire financial planning activity. After all, if you don’t know where you want to reach, then it really does not matter how fast you run. That applies to your goal setting too.
- A very important part of your goal setting is insurance. That includes life insurance and medical insurance. Both these insurances are available to you at the best rates when you start early. Therefore, is always advisable to start setting goals early so that you can plan adequate insurance early on and also get it at the lowest cost.
- When you set your goals at the very beginning you are able to plan your investments easily along the way. The sooner you start, the more your money earns and the more your returns also earn. This is called the power of compounding. That is a big wealth creation advantage if you set goals early and start off at an early age.
- Goals (even the best of them) need to be monitored. That is only possible if you set your goals in a calibrated manner right at the very beginning. It will ensure that in the event of any black swan event, you have enough time to take corrective action. Review and rebalancing are key steps in making your financial plan successful.
- Finally, setting goals early gives you a sense of perspective. You can accommodate more goals and dreams within your budget, which would not be possible if you start at a late stage. Starting your goals early is all about getting more bangs for the buck.
