When one reads the word ‘financial goal’ it sounds like a very complex and stressful task. The word goal in itself makes us think, ‘do we have one?’ If not, then are we supposed to have it? Hang in there! We’re going to answer all of these queries. Let’s try and understand ‘financial goals’ in a manner that one can connect with.
Most of us are aware about the sport — football. It is a simple game where two sides consisting of eleven players each play to score a goal in the opposition post. Now, imagine these players playing the game without having a goal post? That’s not possible, right? Similarly, for one’s finances, one needs to have goals and invest money in mutual funds, SIPs and so on. Simply put, when one invests with a target to achieve his set of goals in life — it is termed as a financial goal.
What constitutes a financial goal?
There are three questions that comprise one’s financial goal.
- How much money do I need?
- For what purpose do I need it? And most importantly,
- When I need that money?
Here’s an example of a financial goal — Rohit requires Rs.10 lakh, after five years for his daughter’s wedding.
Note: All factors must be included. Even if one of them is missing, it won’t be a financial goal.
Financial Goals Based on Time Frame
The goals could be short term; medium term and long terms depending upon the time frame and the size amount one needs to get. Let’s define each of these with a realistic example. An international holiday would be a short term goal. On the other hand, a medium term goal can occur between one to five years. Buying a car, kid’s high school education, buying a home, all all under this. Lastly, long term goals have a longer tenure — for instance retirement planning, higher studies for children abroad and so on.
An important aspect of each of the time frames is selecting the right tool for investing. So, based on the time frame and risk appetite it depends whether one goes for direct equity, mutual funds or even the other alternative asset classes.
Financial Goals should be — SMART
Financial goals should be SMART. And what does SMART stand for?
S stands for specific, means specifically ascertain what you want. Even slightest deviation from specifics would result in delayed attainment of financial goals. Specifically mention — who, what, when, where which and most importantly why aspect of the financial goal.
M stands for measurable, means it can be measured in terms of monetary factors. Using words like significant amounts of money does not measure the actual requirement.
A stand for achievable. This factor focuses on how important a goal is to you and what you can do to make it attainable or achievable. Taking care of factors like if one requires developing new skills and changing lifestyle or over spending behavior, falls under this parameter. This one is meant to inspire motivation, to keep one going in the right direction.
R stands for being realistic. The end result of any financial goal depends on the kind of investment you make, the risk you take and eventually the time frame you keep. So, if you have a smaller amount to invest, with lower risk and very small time frame — attaining a larger amount goal becomes impractical.
Lastly, T stands for timely. As the saying goes, start early to get a major advantage of compounding factor. Longer the duration — better the wealth creation is. Suppose someone plans to attain a retirement goal when he is nearing his fifties — it would be difficult for him to build a right corpus. But if the similar thing starts from early twenties — the investment required would be lower and a right corpus can be created.
Defining the risk appetite and selecting a right investment instrument
Once you know your time frames and goals, defining your risk appetite and selecting the right investment instrument is the next step. For short term goals one can consider liquid schemes or other risk free investments. On the other hand, for medium and long term goals, inflation plays a role, thus, one needs to consider the risk there and invest wisely. For instance, car prices increase over a period of time, so if one wants to buy a car in two or three years, one must consider the future price which includes inflation.
Not everyone is lucky to have benefits of pension or other way of income sources. Add to that, the inflation factor, the task becomes more daunting. Here the compounded annual growth rate (CAGR) comes in handy. Like equity investments generate a CAGR of 14 to 16 percent. Even the mutual funds generate a good CAGR between 10–12 percent over a longer period. Cycles may be deceiving in less than three years period — but when the goals are set for more than three years — risk mitigation occurs naturally. In nutshell, whether the financial goal is long term, medium or long term — understanding your own risk appetite and amount you can set aside now (invest now) on a regular basis — a right instrument can be selected.
Benefits of setting Financial Goals
While a lot becomes easier when we are focused on goals here are few of the benefits of financial goals. First and the foremost is, it gives a purpose to your investments. Like we mentioned earlier — soccer players just passing the ball to each other without having a goal post to score is meaningless. Similarly investing without financial goals is meaningless. Secondly based on time frame and risk bearing capacity, one can select right investment products like Mutual funds (equity diversified mutual funds, balance funds, debt funds or liquid funds etc). Further investment discipline is developed as its regular process and hence commitment is necessary. Portfolio diversification also becomes easier as the investment plan is spread over a longer duration. This helps to mitigate the risk by a certain amount. Lastly, it results in financial independence. In the current uncertain scenario where technology is changing almost every day — financial independence is a necessary. By setting a right financial goal at the right time with suitable risk — financial independence can be achieved.
Conclusion: Investment without financial goals is meaningless. Set your short term, medium term and long term financial goals — earlier the better.
Pro Tip: Your dreams are going to cost you more in future. So selecting a right investment vehicle as per suitable risk and timeframe with ability to beat the inflation is a necessity. Set your financial goals early and attain financial independence.
