We all know that financial planning is all about creating a game plan for meeting your financial goals. But what exactly do we mean by defining financial goals. Remember, to achieve your dreams you need to translate them into goals. To attain these goals they must be broken up into smaller milestones. Defining a goal is about setting up these milestones and translating your goals into financial numbers. If you are wondering how to go about defining your goals, there are 10 basic rules to help you define your goals in a more simple and granular fashion.
Financial goals cannot remain a statement of intent alone. They have to be actionable. The following 10 rules are critical here.
- Goals may pertain to the short term like a margin for your mortgage or the long term like your retirement or for your child’s education. Either ways the time frame of the goal must be clearly defined without any ambiguity. In fact, the clearer your goals are, the easier it becomes for you to create a plan to achieve your goals. Normally, we define short term as up to 3 years and long term as a period much beyond that.
- Goals have to be ambitious; after all what else do you work towards. But goals must also be grounded and down to earth. For example, don’t start with the goal that you want to grow your money 10 times in 5 years. That is not something you can realistically plan for.
- Future goals must be based on a premise that is reliable. For example, you cannot set your long term financial goal based on the returns earned by a high-risk fund over the last 3 years. Similarly, don’t ever use 1-year returns or annualized returns benchmarks to target returns for your fund.
- When we talk of defining goals we talk of financial goals. A financial goal is something that can be translated into monetary terms. Generic goals like “I want to be content” or “I want to be secure” do not amount to financial goals. All goals have to be necessarily expressed in monetary terms.
- It therefore logically follows that all financial goals must provide for inflation. Use average inflation over a longer period of time. Don’t use 2% inflation just because the Indian economy has been facing 2% inflation in the last couple of months. Be realistic but it is still better to err on the side of caution.
- Goals are those that can be broken up into milestones. When you plan for your retirement after 30 years, it is pointless if you cannot monitor the progress towards at least once in 3 years. For that your goal setting has to be granular and they have to be broken into time-specific and monetary milestones.
- Your financial plan therefore must be flexible enough to be modified as per the changing needs. If you are planning for the next 10 years and let us say, for example, you have invested in a structured product. Then, there is no mid-way exit route for you in case you want to do a course correction. You need to be wary of that!
- All goals must necessarily pertain to a specific need. You cannot save and invest just at random. You must have a clear-cut goal like retirement, future annuities, child’s education, child’s marriage, international holidays etc. Unless you match your plan to a pre-defined goal, you are unlikely to be able to demarcate goals properly.
- Remember, goals are not just about returns but also about risks. Your focus should be to either get the maximum returns for a given level of risk or to reduce the risk for a given level of return. These are the 2 basic founding pillars of your goal setting process.
- Finally, financial planning is not just about returns and risk but also about liquidity and tax planning. When you select an ELSS fund instead of a diversified equity fund, then the tax exemption under Section 80C makes a huge difference over the long run. Similarly, when you opt for debt funds over bank FDs, the tax differential on interest and dividends makes a vast difference to your post-tax return. The most important part here is to make liquidity available when required, to the extent required and without impairing your portfolio. It could be your margin money at the end of 3 years, your child’s education payment after 15 years or your own retirement after 25 years. Especially, your retirement must be planned as a mix of lump-sum and annuities.
The success of your financial plan will eventually depend on how effectively you define and monitor your goals. Take care of the micros and the macros will take care of themselves. Don’t spend too much time wondering how markets will evolve; you do not have control over that. Spend more time in managing your debt and ensure that your plan has adequate cushion. That is the key!