Setting one's financial goals - make your goals a reality

Greetings on Dussehra!

This is an auspicious day for new beginnings and wishing you success in every endeavour, project. Every new project to be successful requires thoughtful planning and the same is true in our financial lives.

Necessity of financial goals

Any investment leads to an accumulation of assets that are primarily meant to be used, either by the investor or by the next generation. The presence of assets in a household's portfolio is to provide it support and security to deal with financial ups and downs and with income when regular salary or business income stops. 

The financial lives of investors can be divided broadly into the accumulation phase, when assets are built, and, the distribution phase, when assets are used. Typically, the distribution phase also represents a time when investors are unable to add to their assets. This phase is identified with old age and retirement when earning capability falls or completely vanishes. Therefore, building assets in the earning phase would mean a focus on maximisation of saving and investing capability.

Without goals, one will find it difficult to make the decision about how much should be saved and invested and where the the investment has to be made. You move from being a saver to becoming an investor when you define financial goals first and save with a specific purpose in mind. Framing objectives or goals is the first step in financial planning. Here are the important things to keep in mind while doing so.

Goals should be specific

It is important to set specific financial goals. A specific figure to be reached should be in mind. Write down your objective / goal. It should stare you in the face. Work out the desired amount required - "This is what I want in _____ years" . The time / duration in which you have to fulfill the goal should be  defined. Only then will you be able to figure out how much you need to invest and which financial instrument to choose. 

People tend to assign random figures for their goals without understanding whether the money saved will be sufficient or whether it will be feasible to put away a big amount. 

Financial planning should not be based on approximations and instinct. Specific goals facilitate a review later.

Attainanble

The goals should be attainable, reachable by mortals. You may not be in a position to hope for a house like Antilla! This also means that the goal is realistic,  actionable and not just a pipe-dream. 

Action Plan

Once the goal is set, an action plan to achieve the same must be clear. One has to save an amount to be invested annually, monthly. Investors have to first plan out how the savings target would be met. Several online calculators are available and you can arrive at the amount you need to save and the time available to achieve each of them. For example, a calculator would show that  Rs 48000 a month is required to be put in a recurring deposit at 9% for three years to save Rs 20 lakh as down payment for a house.

Next, there should be clarity about the investment instrument. As part of the action plan, it is best to automate the investment process i.e. an SIP into equity funds, RD into banks for short term goals etc. 

Every goal has a different time frame. So you need to match the investment avenue with the time available for that goal. If you have less than three years to save for your son's college admission, you should invest in debt rather than equity to ensure the safety of your capital . Your returns will be muted since debt instruments deliver about 8-9% but at least your capital will be safe and available when needed. If you are saving for retirement which is 20-25 years away, you should put a larger amount of savings in equity-oriented mutual funds. Equity investments are likely to yield higher returns in the long term, though there could be periods of volatility in between. 

Prioritise goals

Investors can have a big list of goals. However, each goal should be assigned a level of priority, depending on its importance, time horizon, financial impact on other goals, and the manner in which you will arrange the funds for it. For instance, buying health insurance is a more important and immediate need than buying a car. This will ensure that your other goals remain intact since a medical exigency will not wipe out your savings.

The way to succeed in your financial life is - Plan out your life and work out your plans!