It is easier to have financial dreams, like repaying student loan in one shot or buying a perfect home in a month or buying a latest car or booking air tickets for your world tour, but difficult to have concrete financial goals that you can actually work upon. Setting financial goals is fundamental to the financial planning. The financial goal must not be complicated, tedious or long. It is a tool to ensure you are on the right path. Let us look at some steps for effective financial goal setting which are measurable, purposeful and realistic.
Figure out your goals
Most often, couples do not on their financial goals. Have a brief conversation on goals, values, and kind of lifestyle you want to lead. When setting financial goals, make sure it is specific because vague goals are not effective. For instance, goals like ‘save to buy a nice car’ is really a vague and an ambiguous goal. Because this goal is not answering questions such as how much do you want to save? Will it be a new or used car? When do you want to buy it? A specific goal goes like this, “Save R20,000 per month to buy a sedan by December 2015.” This is a specific goal as you know how much you need, for what and when.
Term of goals
There is no unanimity even among economists on what constitutes short, medium and long-term goals. Thus, every investor has a different notion of what short-term and long-term are. Ideally, short term is anything between 1 and 5 years, medium 5-10 years and long is over 10 years. It is a good idea to determine these categories so that they can be used effectively. For instance, a short-term goal: save R5,000 every month for a summer trip to Kashmir in 2016 , an all-inclusive trip at a four-star hotel. A medium-term goal could be to save R5,500 per month for son or daughter’s college education in 10 years and a long-term goal could be to build a corpus of R2 crore as a retirement corpus. Your goals must not necessarily focus on saving, but it could be paying down debt as well.
Review goals consistently
Having a specific goal is important as you would be able to measure it. If you target R2,40,000 in the two years for a car, you know you would need R10,000 a month. So every month you can see if you are on track or need to modify the goal. You must review your goal regularly. For a short-term goal, you must to do a monthly checkup, if it is long-term, quarterly or semi-annual review will suffice. Irrespective of the duration, one must do a quarterly update.
Plan as per goals
You know your requirement and how much time you would need to reach to that target. Having all the information is crucial as without them, the exercise is worthless. Now, you need to set up a savings or debt-repayment plan, this could be a monthly or biweekly plan. You will have to work backwards to figure out how much you need to save to reach that target. Base your plan on your current financial condition and do not factor in raises and bonuses or an extra income that currently you do not have. Make sure your goals are realistic and achievable and it is better to start with smaller goals and move to bigger goals.
The writer is associate professor of finance & accounting, IIM, Shillong