KNOWLEDGE CENTRE Financial Planning / Why You Should Define Your Financial Goals Before You Set Them?
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Why You Should Define Your Financial Goals Before You Set Them?


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 your goals is an important step because it determines which investment option you need to invest in, the risk exposure, how much you need to invest, and even how long you should stay invested. Defining proper goals consists of a lot of factors, some of which are setting the correct money value to your goal, accounting for the inflation over years, determining the conservative returns of your investment, and figuring out the time period for which you should remain invested.

How Should You Define Your Financial Goals?

You should take some time to define your goals properly, accounting for all the possible setbacks that might occurs, so that you have a higher chance of achieving your dreams. Listed below are ten points that will help you to define your financial goals:

1. Match Your Goals To A Dreams
2. Assign A Time Frame To Your Goals
3. Make Your Goals Ambitious
4. Set Well Researched Targets For Your Goals
5. Assign Your Goals A Money Value
6. Account For Inflation While Setting Goals
7. Break-up Your Goals Into Smaller Milestones
8. Keep Your Financial Plan Flexible
9. Anticipate The Effect Of Risk On Your Goals
10. Focus Some Of Your Goals On Tax Planning

Let us expand on these ideas:

  1. Match Your Goals To A Dreams

    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.

  2. Assign A Time Frame To Your Goals

    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 financial plan to achieve your goals. Normally, we define short-term as up to 3 years and long term as a period much beyond that.

  3. Make Your Goals Ambitious

    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.

  4. Set Well-Researched Targets For Your Goals

    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.

  5. Assign Your Goals A Money Value

    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.

  6. Account For Inflation While Setting Goals

    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.

  7. Break-up Your Goals Into Smaller Milestones

    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.

  8. Keep Your Financial Plan Flexible

    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!

  9. Anticipating The Effect Of Risk On Your Goals

    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.

  10. Focus Some Of Your Goals On Tax Planning

    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 flexibility. Download the Angel Bee app today to get automatic mapping of your goals to the best investment options with the help of our advanced mutual fund investment engine.


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