How to Set Financial Goals ?

Background: How to Set Financial Goals ?

In earlier article we have understood How to do Money Management? . With Proper Budget and record keeping of your income and expenditure, you have saved money and there is requirement to invest money . Before we get in Investment Planning, it is very important to set Financial Goals . You should know How to Set Financial Goals .

Why I should have Financial Goals ?

Really very good question because this generation don’t believe in long term planning or investing in heavy asset class like Land or costly houses . Young generation wants to be independent . Same case may be with other age groups too where people just buy policy as their relative is insurance agent or invest in Mutual Fund or investment product as suggested by colleagues . Can we go and buy medicine over the counter for all illness or for cold and cough only . Answer is we need Financial goals like buying house, car, marriage etc. Even no goal is a goal. We need proper Financial goals and professional financial advisors too. When you have Financial Goals in life, you can decide timeline and have discipline investment every month bases on your goal ,tenure and risk profile .

Process : How to Set Financial Goals ?

1. Identify your Goals:

First step is to identify your goals . This will vary from person to person . Few examples of Financial Goals are as under :

• Buying House
• Car
• Marriage
• Child Education
• Insurance
• Retirement
• To start own business/start-up
• Vacation

2. Quantify your goals:

It is very important to quantify your goals . Say you want to buy house worth Rs. 1 crore . Now your financial goal is having some value . Assume your age is 35 years and you want to retire at age 60 so you need retirement fund of ~ Rs. 9 crore to earn you minimum 1% p.a. return over and above inflation post your retirement age to match your current or expected living standard . Oh ! I can’t think that long ! No issue, What is in our hand is financial planning and human efforts , let us work in that direction

3. Decide tenure of your financial goal:

Now think when you want to buy house .e.g after 3 years or your retirement which is 25 years away.

4. Setting the financial goal :

Now you know that you want to buy house worth Rs.1 crore in next three years. You need margin money of 20% i.e. Rs.20 Lakhs after 3 years and rest you can take home loan. Total EMIs should not exceed 50% of your total take home salary/profit.  You need to start invest in medium term debt mutual fund or fixed income (post office etc.) to get this amount by end of 3 years. Same way for retirement which is 25 years away , you have time for long term investment . It is highly recommended to invest in Equity or equity MF for more than 5 years investment however investment in equity is subject to risk profile of investor . In case you are low risk investor , it is suggested to invest in safe and fixed return product like post office scheme . In case you are moderate or high risk investor , you can invest in equity or MF through Systematic Investment Plan (SIP).

5. No Goal is Financial Goal :

In case you don’t want to fix goals , you can save and invest as per your risk profile however you have to be careful that when you don’t plan, it is possible that you will use fund for less priority item. Discipline can be an issue. After all this is your money and there is emotional aspect to it .

How to decide investment product for financial goal ?

We Indian love liquidity . We want investment product with highest return say more than 12 to 14 % return with highest security alike government bond and post office scheme and want to get money back any time . It will not happen in real world . There is no free lunch . If you are parking Fixed Deposit with Bank at 5% p.a. interest , Bank is using same money to lend to someone at 12 to 14% p.a. depends on his credit score and risk profile . Further it depends you key policy rate. viz; Repo rate, Bank rate etc. You can check key policy rate from RBI Website. In next article , we will understand how to do Investment Planning and select investment product.

Conclusion:

Hope you have got an idea about how to set financial goal ? Quick recap: It starts with identify financial goal, quantify value attached to that goal and deciding timeline i.e. when you want ? If you take first step towards your goal , you have won half battle because we are too busy in our day to day life that we don’t get time to plan our life and we have accepted the reality that life is like this . Please have some time to set your financial goals. Please give your valuable feedback in comment section .