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Financial Planning

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Financial Goals

To make sure that your budget is successful, you will have to set some objectives so that you can measure your performance easily. These objectives are known as 'financial goals'. Having financial goals will give your financial planning the direction it needs so that you can maintain your standards of living while saving and spending as per your needs and wants. By setting your financial goals you will be able to define your priorities, establish a direction and identify the results that you expect to achieve. When listing down your financial goals, take care to make your goals measurable, realistic and time bound. 

How to Set Financial Goals?

Step 1: Identifying your goals of life- There are many things that we aim to do in our life, and most of these may require additional funds. The first step, therefore, is to understand your own goals. These may include -

  • Purchase of home 
  • Purchase of Car 
  • Child’s Education 
  • Supporting your parents 
  • Child’s Marriage 
  • Retirement 

Step 2: Classify your goals- After you have identified your goals, segregate them on the basis of - Priority (How urgent is their completion?); and Proximity (At what point of time from now, will you have to complete these goals?).

While priority of a goal can be high, medium or low, the proximity of a goal can be of three other distinct types -

  • Short term (less than 3 years) 
  • Medium term (3 to 5 years) 
  • Long term (more than 5 years) 

This will help you know what goals are to be met first. Knowing so can help you channelize your investments accordingly, based on the time to the goal and your risk profile. 

A sample table such as the one ahead will help you form an idea which goals are the most important (priority) and also see which ones are urgent (proximity). It is important to remember that this table can differ from person to person.

Step 3: Quantifying your goals- If a goal is not quantified, it becomes very difficult to select a path to achieve it. Again this can be divided into two parts, minimum and maximum. 

For example, you may have a goal of funding your child’s higher education. For this you can consider two scenarios.

1. Let the first scenario be the case of your child being educated in India. For this, the fees may be ₹10 lakhs. This will be the minimum quantity of your goal.
2. Maximum amount for the goal would be sending your child abroad for further studies. For this, the fees may be ₹25 lakhs. 
Now you know that the minimum you need to achieve is ₹10 lakhs in today’s terms. You can start investing accordingly.

Step 4: Plan and Invest towards your goals- Once your goals are quantified, i.e., you have a tenure, an amount and a clear idea of your goals, it is time to actually plan for these goals.  

Remember, your goals should be SMART.

  • Specific
  • Measurable
  • Attainable
  • Relevant
  • Time-bound

Also note that conflicting goals are a fact of everyone’s life. You must do the best that you can to resolve this difficulty by allocating your available resources in the most efficient manner possible to those goals that have the highest priority. Also, you should evaluate your investment progress regularly. If the progress towards the goal is not satisfactory, then one or more of the following options can be exercised: 

  • Review your investments and alter specific investment amounts / investment instruments.
  • Push the goal further back, where possible. 
    For example, if you are planning to retire at 50, consider retiring at 55 instead, giving yourself more earning years. 
  • Reduce the goal corpus that is required. 

If you want to buy a house for ₹75 lakhs, consider starting to save for a house worth ₹60 lakhs. Setting your goals is typically not an ongoing process. You can set your goals and begin working towards them. Remember, what is an ongoing process is improving your own personal financial literacy. This is why we set financial goals - to become financially independent in the future. Review of progress towards your goals should be done typically once a year.

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