Setting goals can be valuable and motivational as anyone using a fitness app knows well. The comfort of the couch is easier to resist when your smartwatch informs you that you are short of your daily step or exercise target. Similarly, without a target many investors do not know how much to save, how much risk to take and which type of investment vehicles to use, etc. Further, visualising a retirement goal can motivate one to save even when retirement is years away. Let us discuss the same in detail.
If you are in the very earliest part of your earning cycle (say around 21 years), you should look at saving for retirement as a marathon rather than a sprint. Instead of focusing on the amount of money that is required to retire at 40 or 50, which may seem to be completely out of reach, one should reverse-engineer the process. If you start saving in the early 20s, then around 60% to 70% of the amount you will have saved at retirement will come from investment gains rather than contributions.
If you wait until age 40 to start saving, it gets flipped the other way—more will come from your contributions than your investment gains.
Goal helps to review your spending
Once you have set a monthly / weekly savings goal, you need to work out how you are going to achieve it. This may involve a review of your current cash inflow and outflow so that you can establish exactly where your savings amount is going to come from. Take a good look at your finances to see if your goals are within reach. Calculate your monthly income based on your pay slip, other income in cash, if any. Then, check your transaction history on your bank website or simply with a piece of paper to track your expenses. This way, you will know where your money is going, how much you have left and what amount is reasonable to set aside each month. If you want to reduce your spending to put even more money toward savings, identify your unwanted cash outflows and curtail the same.
Another reason for setting a savings goal is that having a target helps to keep you motivated. Set a savings goal, name it, write it down and pin it up somewhere that you will often see it. This reminder will keep your savings ambition in the forefront of your mind, motivating you to achieve your target. Whether you’re looking to save Rs 10,000 for an upcoming festival or Rs 1,00,000 for the down payment on a new car, setting a specific goal gives you a target to aim for. Once you have set a goal, work out how much you need to save monthly. Breaking down the amount into manageable chunks makes it easier for you to stay on track. Once your routine is established, you will feel more in control of your savings. Saving on a regular basis, perhaps by setting up a direct debit or standing order, is a hassle-free way to put money aside.
To conclude, after several decades of gainful employment, you have every right to expect a long and happy retirement. Financial decisions you make now could go a long way to ensure that you enjoy your golden years to full effect.
The writer is a professor of finance & accounting, IIM Tiruchirappalli