What Is The Difference Between Your Needs And Your Goals?
When it comes to financial planning, we tend to use a lot of words interchangeably. For example terms like wants, needs, goals, dreams and objectives are all terms that we use interchangeably. While the precise definition of each of these concepts may differ, we need to understand a fundamental difference. There are two sets of concepts here. On the one had we have amorphous concepts like wants, need and dreams which do not exactly have any prescribed form. You can dream to be rich, you may want to be happy and you may need to be conservative. On the one hand we have more structured concepts like goals and objectives which forms the core of financial planning.
What is the difference between your needs and your goals?
This is a fundamental difference. Goals and objectives can be articulated. That means they can be put down on a piece of paper and they are very specific in nature. Saying that you want to be happy at the age of 60 is an extremely amorphous and unstructured statement. You need to fill in the blanks here. Do you propose to take a foreign holiday? Do you propose to spend on your grandchildren? Do you propose to create an emergency fund in your bank? All these are very specific objective. When your needs and dreams are articulated; that is when they become goals. Goals call for a proper form and structure to your wants and dreams.
Why should your goals have a financial implication?
This is, probably, one of the most important distinctions. Just dreaming that your child will be able to study at an Ivy League university is not enough. You need to understand how much the education costs today. Then you have to inflate it and estimate how much it will cost after 15 years. Then you need to take stock of what are the sources of funds you have and how much additionally you need to plan for. Based on the time frame you can decide upon the risk appetite that you can take on and your return expectations. That is when your dream takes the first step towards becoming a goal. You can work towards a goal but you cannot realistically work towards a dream. Apart from giving form to your dreams, goals also estimate the financial implication of the same.
Why should your goals have milestones?
This is an important step in your financial planning. Here your goals actually morph into objectives. What do we understand by checkpoints? Any long term goal has to be measured by a series of intermediate goals. You cannot say that you want to retire peacefully after 25 years and just create a SIP and forget about it. There have to be intermediate checkpoints. If you plan to grow your wealth by 16% annualized over 20 years, you need to review at checkpoints of 3 years and 5 years. If at the end of 5 years your returns are negative, then you are only getting farther from your goals. By setting intermittent checkpoints your goals actually morph into objectives. That makes your journey towards your goals more realistic and achievable.
Why your goals should be prioritized?
When you give structure to your dreams and calculate the financial implications the first step you take is to prioritize your goals. Your immediate goal is to arrange the margin money for your home loan. Your child’s education is your intermediate goal and your child’s marriage and retirement are your long term goals. Now you have understood the time frame of your goals. The next step is to prioritize. If you have two short term goals competing for resources like a foreign vacation and your home loan margin, you will obviously prioritize your home loan margin. In the longer term, given a choice between your retirement corpus and buying a second home, you will obviously choose building the retirement corpus. When goals get prioritized they actually become actionable.
How should your goals be monitored and measured?
In management parlance there is a popular saying that “Goals that cannot be measured are just statements of intent”. When you lay out your financial plan and define your goals and checkpoint objectives, there has to be measurement. Is your current financial plan on track to achieve your goals? Is your investment mix right for your goals? Are you under-insured or are you over-insured? Are you taking on too much risk or are you taking on too little risk? Are you saving tax by investing in tax saving instruments? Your goals must be constantly reviewed and monitored based on return parameters, risk parameters, liquidity parameters and tax implications. Frequency of monitoring is another issue. Obviously, you do not have to monitor your goals like you monitor your trading account or your stock price screen. Short term goals can be monitored each quarter and long term goals can be reviewed each year. That should be good enough!
Understanding these subtle differences between amorphous dreams and structured goals & objectives is at the core of financial planning. It surely helps your journey towards your financial health and wellbeing. To better understand your goals, and get plans along with timelines to achieve them, download our Angel Bee mobile app!