When it comes to planning finances, one of the most critical things is identifying financial goals. Specific goals are needed or else an individual would be investing in randomly different financial products.

Everybody has a goal in their lives and many of the goals require money. For instance, we can manage our children’s monthly school fee from our salary but can we meet the requirements of children’s higher education from our salary? We need to save for it for years. That is why, first we need to identify financial goals.

Set smart goals

There is a popular acronym for goal setting. It is SMART where S=Specific, M=Measurable, A=Achievable, R=Relevant and T=Timely. This is the simple logic that helps in setting your financial goal. Let’s go through one by one.

First, the Specific goal. We all have our life goals like buying a house, funding children’s education and marriage, retirement money, etc. But we have to list our goals. Second is differentiating between need and desire. For example, I have a car which is five years old. I am looking for buying a new car but do I need the car right now? Is it need or desire? I don’t have any need to buy a new car as my old car is working fine. So we have to differentiate essential and non-essential goals.

Now that we have categorised our goals into needs and wants, the next step is how much of it is measurable and achievable. We have to categorise our goals according to their time horizon. Does our goal come under immediate financial goals like less than one year or short term (1-5 years) or medium term (5-10 years) or long-term (10+ years). The advantage of this is that a time period gives a lot of clarity when doing financial planning. That’s because a major factor that decides where we should be investing in is time available for the goal.

Assign priorities

All our goals are needs but we have to assign priorities too. Repairing a house may take priority over children’s education when the house is in dire need to repair in terms of safety. Clearing short-term loans may take precedence over saving for children’s marriage. There are plenty of examples where you have to assign priorities to your goals.

We don’t have an unlimited supply of money. We cannot have everything we want and we need to accept trade-offs. The categorisation helps us in ensuring that important goals are taken care of first. As Janet Evanovich says, “The best we can do is prioritise our needs and make choices accordingly.” Or as Stephen R. Covey said, “Most of us spend too much time on what is urgent and not enough time on what is important.”

Cost of each goal

Finally, we have to know the cost of each goal today. Yes, we know we need `10 lakh for children’s wedding or `8 lakh for children’s education but an MBA degree which costs `8 lakh today may cost much more in five years. It may become `10 lakh. So we need to adjust for inflation and anticipate how much it will cost in future. There is no point in saving for `10 lakh when the actual cost would be `15 lakh.

So, to set our financial goal we need to follow this simple approach where we have listed our goals, differentiated between need and desire, categorised them into short-, medium- or long-term goals, assigned priorities to them and have identified the cost for each goal.

Now is the time to take action. Many investors priortise tax savings. Tax saving should be secondary. According to our needs, priority and time duration, we can find the right balance of debt and equity investment. Remember one should be investing correctly keeping in mind goal-specific requirements. We would be like a rudderless ship, going nowhere if we invest randomly without any goal.

BY- Dhruv Desai. The writer is director & COO, Tradebulls Securities