Someone rightly said, “An investor without GOAL is like a traveler without a destination.” But setting financial goals is not an easy task so let’s simplify the whole process of financial goal setting – smart way, You can check what are financial goals, few financial goals examples & finally you can download a financial goal planner worksheet which will help you in converting your dreams into reality. Also, note returns cannot be your goal in investing.
Check – Importance of Financial Planning
How to Set SMART Financial Goals
Recently in one of the Soft skill Learning workshops, people were asked a question, that what they would like to see of themselves in the coming 5 years and 10 years in their professional lives. The majority of the answers that came were very vague in nature like I would be a good manager, a human being, successful or I will develop leadership skills, etc. Best brains were not able to picture their own future or could not set a goal today that they would achieve in the coming years. I think the same happens when we confront a more valid question about our financial goals.
What are Financial Goals?
If I ask you what you will like to become financially in the future, the majority will say just one word RICH, but how much rich? Rich with what, assets or cash? 2 houses or 1 farmhouse or Rs 2 cr for retirement or Rs 50 lakhs each for the wedding of two daughters? This is common when we are not clear of our financial goals. And clarity comes when we actually plan financial goals and understand them. Financial Goals are set first and then a road map is created to achieve them. But again the basic question – how do I set my financial goals?
Financial Goal Setting – SMART way
Any goal, financial or otherwise will become a Smart Goal when you add the following features:
Smart Financial Goals are SPECIFIC
As mentioned above, being “Rich” is a goal but not a smart financial goal. If I put it like this that I wish to plan for my retirement, so that I am financially independent – it becomes more specific. The statement specifies “richness” and the time by when you want to achieve the goal. But again this is not a smart goal. Something is missing. Let’s see what more it needs to become a smart goal.
Smart Financial Goals are MEASURABLE
Besides being specific one should also be able to assign a number to the goal. Instead of saying “financially independent” it should define the money in a number of terms. This is not simple as it looks. When you wish to assign a cost to future expense, you need to guess or calculate the numbers taking a few realistic assumptions like inflation and interest rates. These assumptions can also vary. For example, the inflation rate on Education can be much higher in comparison of buying a car. So it is an expert’s job. But when you assign numbers a goal becomes measurable and comparable also. So for the above example if I say (in present value) – I wish to buy a new car of Rs 10 Lakh and a house worth Rs 60 Lakhs in Goa.
Smart Financial Goals are ACHIEVABLE & ATTAINABLE
Only decorating the goal with numbers is not smart work. A Smart goal needs to be thoughtful and has to be seen in the light of practicality as well. We have to see if this is attainable or not. It should not be an out-of-reach dream that one starts to work upon and expect magic to help. Again expert advice is required here and he can help you to understand its reality. Also sometimes a non-achievable may be adjusted and can be made achievable. So we need to sit and give deep thinking and even ask for expert help. Again for the above example – can a person earning Rs 30000/- per month having 2 kids to support and a monthly expense of Rs 20000/- achieve the above-mentioned goals? What if he has not started saving till today? Or what if he is bound to get some inherited money? So under all these circumstances, which are unique for all individuals, we need to check the attainability criteria of a goal to make it a smart financial goal.
Smart Financial Goals are REALISTIC & RELEVANT
Goals should be realistic – you can’t say I will build my retirement goals by investing in the last 5 years of my job or I will invest Rs 500 per month to achieve my retirement corpus of 3 crores.
Smart Financial Goals are TIMELY or TIME-BOUND
This is the last step of financial goal setting but is very important. There should be some time limit attached to every goal. For exp, I want to buy a car in 5 years or I want to buy a house in 2030.
Prioritizing Smart Financial Goals
Why are financial goals important? Life is not like a play script. It does not dwell on one theme or issue. It is full of phases, events, and happenings. In financial life, one has to invest today for things he would require in a very short span like annual premiums or kids hostel fees and for the expense that would behave long spans like kid’s marriage or retirement. Thus goals need to be put on the priority list. Once these are recorded on the time frame they can be classified as immediate goals, mid-term goals, and long-term financial goals.
Financial Goals Examples (Indian Context)
Short Term Financial Goals:
- Making a contingency fund or emergency fund for the family.
- Saving for school admission of kids.
- Saving for purchase in the near term like a domestic appliance or for treatment of a recently diagnosed ailment.
- Saving for life insurance premiums.
- Investments for tax planning. (actually, it’s mean but people think it’s a goal)
Medium Term Financial Goals:
- Retiring a loan or debt.
- Planning for a foreign trip or a vacation.
- Saving for college or pre-college expenses for your kid.
- Saving for starting a family in coming years.
- Planning for a new or change of vehicle.
- Saving for home/property investment.
Long Term Financial Goals:
- Building retirement corpus. (both, expenses and medical included)
- Saving for providing inheritance.
- Saving for daughter’s marriage etc.
- Planning a home for post-retirement life or a farmhouse.
Have you set your SMART Financial goals?
Before I close, try answering these questions:
- Have you decided your financial goals?
- Have you checked are these goals Smart?
- Have you prioritized and taking action to your financial goals?
If “NO” is the answer to any of these questions, it’s time you take a pen & writing pad. Download Financial Goals Worksheet & start making smart goals.
Financial Goals Planner Worksheet – Download
Smart Tip: Someone rightly said, “An investor without GOAL is like a traveler without a destination.” The most important part of financial goal setting is writing them. Writing makes goals visible & tangible – now goals are not just a thought but a commitment. Go & write your smart goals. Keep this sheet at a place where it keeps reminding of your commitment. You should also discuss this sheet with your Financial Advisor Or Financial Planner.
Once you have set the Smart Financial Goals now the herculean task of achieving these goals starts. It is a lengthy discipline and is impossible to pen down it in this article, but I will try to write another article on how to achieve financial goals.
Returns cannot be your Goals
In a seminar, where I was talking to a group of young investors, I repeatedly told them to have Financial Goals before they start investing. Annoyed by my repetition, one young guy stood and said, my goal is to achieve 30% returns per annum. Can you help me to achieve that?
Now let me clarify his statement to all of you.
• The world’s richest and the most successful investor of all times “Warren Buffet” could not achieve 30% return consistently over his 50 years of investing.
• His rate of return on investment is more 24.7% p.a.
• If you would have invested Rs.1 lac with Warren Buffet 50 years before, you would be worth more than Rs. 621 crore today. This is just equal to what was his compounding rate of 24.7%.
• But if your rate of return would have been 30%, your 1 lac would have become closer to Rs.5000 Crore.
For god sake, I can’t give that much return to people, if someone can achieve that, please contact me, I shall give all what I have. For sure, I will give Rs. 1 lac.
What this young guy said was not new to me and most investors think that they are investing because they need to earn high returns. In fact, I thought the young guy had at least an idea of how much return he wanted to earn, most people we talk just land up asking for a HIGHER return. There is no definition of HIGHER RETURN that they have.
Investing just for earning return cannot be anyone’s target or AIM. Having more money cannot make you happy, but fulfilling your dreams can make you happy. All of us have certain dreams in our life and those dreams need to be fulfilled to lead a happy life. In the hindsight, we all land up investing for our goals only, it is the long-term Financial goals for which we don’t plan or for that matter, we are not clear.
Let me explain to you in other words.
• We all have a savings account and we keep money there. Even though we may not really need the money, but still we are comfortable to keep the money there even at the lowest return.
• The reason we have our money there is one of our financial goals, that is EMERGENCY. So even if we are getting high returns elsewhere, we prefer to meet our goal than earn a high return.
I am not trying to say that we should not be hunting for returns. But returns are by-product of investing, the main aim is to achieve our Financial Goals. Typically people go wrong in Financial Planning when it comes to their Long Term Goals. Achieving long-term financial goals involves careful study of a few factors.
• What will be the inflation factor over the years
• What product mix we have to take so that the goal can be comfortably met
• What should be the periodic investment towards that goal
• What should be the PLAN B in case of any mishappening
Just aiming at returns will not lead to goals. If I ask you, my aim is to drive fast, would you agree. Or if I say, I want to take the train that has the highest speed. It sounds odd. You definitely need speed when it comes to traveling but speed cannot be your goal. Your goal is the destination that you want to reach.
Also at times, driving should be a mix of speed and caution, we should strive for balance and not just speed. Similarly, we always advocate for a Balanced Portfolio which will help you in achieving your Financial Goals.
Keep your asset allocation intact and you will then not only achieve your goals but also have desired speed as well.
Hope you enjoyed the article – if you have any questions related to smart financial goal setting, feel free to add them in the comment section.