Setting financial goals early in your career will give you time to draw out detailed plans on how to channelise your savings and investment returns to meet your targets.
Each individual has unique financial goals that should ideally be aligned with his income, age and risk appetite among other things. One needs to identify them according to their requirements and not based on what others are doing. If you’re unsure how to go about making these superlatively important plans, here are some useful tips.
Identify your objectives
Clear objectives with a definite timeframe and value in terms of the money required to achieve them constitutes a financial goal. You must be sure about your short and long-term objectives when setting your goals. For example, you may identify objectives like going on a vacation. Now, estimate the time when you want to go and how much will it cost you. Your plans and research might indicate that you can take 15 days of leave only after a year, and your trip is likely to cost you Rs. 2 lakh. So, your financial goal would be to arrange Rs. 2 lakh in 12 months to go on a vacation. In this way, you can identify all small and big objectives and accordingly define it in terms of financial goals.
Biting more than what you can chew is not suggested when you are about to set financial goals. The goal size should be realistic and within your financial capacity so that it can be achieved on time without disturbing other goals. For example, if you have the maximum financial capacity of buying a car of Rs. 10 lakh, but you set the goal of purchasing a car worth Rs. 30 lakh, it will either affect your other goals or you may not be able to achieve such an unrealistic goal. So, assess your financial capacity before deciding the goal.
Segregate and prioritise
While selecting the financial goals, it should be adequately segregated in terms of tenure i.e., short, medium and long-term. Once you segregate your goals, then list it out based on priority. It will help you to focus on such goals first which are more important to you and which you can’t afford to miss out. According to your goal priority, you can plan your investments and savings to achieve such goals.
Mind the tax and inflation
While taking steps towards setting your goals, you must consider the impact tax and inflation will have on your goals. People often ignore both these aspects, and later fall short of achieving their goals. For example, suppose you set the goal of creating a corpus with expected returns of 8% per annum. You choose to create the corpus using a recurring deposit; however, you failed to take into account that you are in the 30% tax slab and the interest earned on recurring deposits is fully taxable, thus reducing your post-tax returns to just 5.6%, which meant that you would not be able to achieve your target on time or would require bigger monthly contributions towards the investment to achieve the same goal.
Inflation is another important factor that affects financial goals. It erodes the purchasing power of the money. As such, you must factor in the impact of inflation on your financial goals to ensure you meet your financial targets effectively.
Protect your financial goals
No matter how smartly you might have chalked out your financial goals, you cannot rule out uncertainties impacting your journey to achieve them. While you cannot predict the nature of these uncertainties, you can definitely take a few steps to protect your financial goals from life’s vagaries. Getting a life insurance plan with an adequate sum assured to safeguard the financial interests of your dependents if something untoward happens to you and a comprehensive health insurance policy to protect your money in the face of a medical emergency are just two examples.
Another important thing that you must do is have in place an emergency fund worth at least six months of your expenses. If you face any unexpected financial emergency, like a sudden job loss or a family emergency, this contingency fund will come to your rescue.
Setting financial goals early in your career will give you ample time to draw out detailed plans on how to channelise your savings and investment returns to meet your targets. It is equally important to review your progress while trying to achieve your financial goals so that you can make necessary adjustments due to changes in your lifestyle, income, family responsibilities, inflation, so on and so forth.
(The author is CEO, BankBazaar.com)