Source/Contribution by : NJ Publications
The first step in financial planning is setting your goals. In fact, the goals serve as the base to any financial plan. Hence one must be extremely careful in setting his/her goals, because it's only when the foundation is strong, the building stands undaunted to the test of time. Hence you must have definite goals which are free from errors.
The subsequent paragraphs will throw light on how you should go about setting your goals, the points you should keep in mind in order to avoid mistakes.
Difference between a Goal and a Financial Goal: The first thing that you must know before goal setting is, understanding the difference between a goal and a financial goal. A goal when quantified in terms of value as well as number of years, becomes a financial goal. Say for instance, you want your daughter to do her masters from Harvards. This is your goal. But when you say, 15 years from now, you need Rs 1 Crore to let your daughter do her masters from Harvards, this is your financial goal. Here, you must be careful in estimating the future cost of the goal, since you need to take into account an appropriate inflation rate. It is advisable that you seek help from a financial advisor for the goal setting process, so that you don't under or over invest for the goal.
Your goals are interdependent: Your goals are separate but not solitary, each goal exercises some impact on another. And putting all your goals together on one excel sheet or a diary, will give you a broad view and will help you prioritize. You may not start investing for all the goals with immediate effect, but at least you have all of them on your to-do list, so that you can take them up gradually. For instance, your near term goal of paying off your credit card outstanding may push your vacation goal from next year to a year ahead. So, after your credit card debt, you can start saving for the vacation.
Not just other goals, your goals are also dependent upon various financial and personal factors like income, expenses, savings, budget, assets, liabilities, number of dependents, etc. For instance, if currently your income is low due to a market slump, and expenses are high as usual, your goal for buying an expensive sedan in two years time may not be realistic. So, either you have to modify the goal to a mediocre hatchback or maybe push the goal horizon from 2 to 5 years. So, your other goals and your personal and financial factors put together will determine your goal realization and will also help you set the horizon.
Goal Horizon and Investment: The horizon of your goal largely determines the investments you choose. There are other factors playing a role too, like your age, income, risk appetite, risk tolerance, etc., but the inverse relation between horizon and risk associated with the investment plays as the thumb rule. For near term goals, it is not apt to invest in risky products, as it may hamper your goal achievement. For long term goals, you can venture into riskier options, with a greater return potential, since you have the leverage of time in hand.
Link your Goals: Once you have set your goals, link your investments to these goals. Goal linking is crucial because it gives you a clear picture of the needs and the gaps, and the investment product you should choose keeping in mind the amount required and the horizon of the goal. Each of your goals must be linked to a fitting investment, your financial advisor will help you in selecting the right product for each goal, which is capable of producing the required amount when the goal arrives.
Review: Like life, relationships, job, health, and a lot of other things, goals are also not static. A lot of factors can result in a change in your goal, your incomes or expense commitments, your preferences may change over time, some goals may no longer remain applicable beyond a point, and some new goals may take over, etc. Also, your long term term goals will eventually become short term goals and you must take the necessary steps to provide for the transition. For Example, your retirement goal which was 15 years away 12 years earlier, is only 3 years hence, so you need to shift your investments into less riskier options to avoid the impact of short term volatility. So, the bottomline is, goals are dynamic and investments must be restructured & realigned to the goals from time to time.
So, the above were few key points which the investors must be mindful of while setting their financial goals.
To conclude, define your goals prudently, and let your goals keep you going!