Everyone has dreams and aspirations. Some of life’s biggest plans such as your children’s higher education are typically considered important milestones and require large sums of money. Let’s take an example: Arjun, a 20 year old college graduate, wanted to own a car in the next 5 years. After 5 years, when the time came for him to buy the car, he just didn’t have enough money to afford it.
Therefore, you need to plan your finances in order to achieve your financial goals.
Financial goals can be defined broadly as short-term, medium term and long-term, and they usually match your life stages. For example, short-term goals could refer to purchase of a new car or unexpected expenses such as medical emergencies. A medium-term goal might be investing for your children’s higher education. Your long-term goal is likely to be planning for your retirement.
But it isn’t enough to merely know your goal. You need to be very specific about it and plan for it. If your goal is vague, you may not be able to achieve it in the future.
An easy way to go about planning for your goal properly is to remember the word “SMART”. Not only do you have to be smart while planning for your goals, your goals themselves have to be smart!
How do you plan for financial goals?
Clearly define your goals: You must be very specific about your financial goals and also account for other financial goals that you may wish to achieve in the future. For example, Arjun could have thought more clearly about which car and model he really wanted. Similarly, you should think about how big a house to buy and in which locality? Which college do you want your child to study in? Do you want a retirement fund sufficient for maintaining your existing lifestyle or do you want to do much more in your retirement?
Set a time frame:You also need to set a clear time frame for yourself to. That means, specifying when you want to achieve those goals. For example, do you want to buy a car this year or 5 years from now? Or buy a home after 5 years or in 10 years? When will your child enroll in college, and will that be in India or abroad? Will you retire in 30 years or do you plan to retire early?
Cost of the goal: Another very important step is thinking clearly about the cost of your goals. You must not forget to adjust these costs for inflation over your defined time frame. After all, what costs 1 lakh today may cost 1.5 lakh after 5-6 years!
Risk appetite depending on the time horizon: The next step involves thinking about how much risk you can handle. If you want to achieve short term goals such as buying a car or paying a down payment for your house in the next 3-5 years, you need to limit the risk you can take and generally make safer investment choices such as balanced mutual funds, to supplement your savings. However, if you want to achieve medium –long term goals such as funding for your child’s higher education or creating your retirement fund in the next 20-25 years, you can take riskier investment decisions such as equity mutual funds which can offer you slightly higher returns at a slightly higher risk, as will have more time to correct your course and learn from any successes or failures along the way.
But your time horizon is not the only parameter which defines your risk taking ability or risk profile. Every individual’s risk appetite varies based on other parameters, such as age, a change in the number of people financially dependent on the individual, the individual’s current financial situation, general attitude towards decision making etc.
It is therefore very important to carefully judge the risk you can handle, as your risk taking ability is specific to you and can differ from your friend of the same age.
You are ready to seek the help of a professional investment advisor when you have articulated these goals for yourself, and started the planning process. Your investor advisor will then help you to choose the correct investment vehicle. Remember - it is also your prerogative and responsibility to research the investment options yourself, so that you can understand and are comfortable with any recommendations.
- When planning for your financial goals, be specific about your goal, consider the time to achieve them, the likely future cost of the goal keeping inflation into consideration, your risk appetite and which investment vehicles to use to get there.
- Your financial goals and priorities may change as your life progresses.
- Explore your risk tolerance and keep this in mind as you plan to invest.