What is Goal Setting?

It is said that a financial plan is a framework on which your financial future is based. Better the financial plan and the more robust the implementation, the better the output and the better the chances of meeting your life goals. That is the good word; Goals. Let us talk about goals and remember that when we talk of goals, we talk about financial goals.

Financial goals are the goals that can be expressed in monetary terms. If you intend to have a happy and worry-free retirement, how much of a monetary corpus do you need? If you want to send your daughter to the UK for higher education, what are the kind of financial costs you must be prepared for? These are financial goals.

We shall focus on one aspect of goals and start by answering the question; what is goal setting? Of course, we talk of goal setting here, we are talking in the context of financial goal setting. The entire process of financial goal setting is the base on which your financial plan is eventually built. Here is all you need to know about financial planning goal setting.

Understand Goal Setting?

To understand goal setting, let us start with understanding goals. Now, financial goals are milestones that you want your money to cover at a specific time. Note the use of word milestone. That means; financial goal setting makes a time-based plan with specific milestones against which the success of the plan can be benchmarked and measured.

To understand goal setting, let us start with a Wishlist. Remember, these are financial goals so they must have monetary implications and must be specific. Here are some examples.

  • Accumulating Rs.2 crore by the age of 45 Earn nearly 40% of monthly income by the age of 50 only from investments

  • Retiring from a job with a corpus of Rs.5 crore in hand

  • Leave a 1 crore each for both your daughters

Financial goal setting gives you much-needed clarity

In the hustle and bustle of your job and family, it is very easy to lose sight of your long-term goals. That is where a clear-cut process of goal setting and implementation comes in handy. Financial goals will remind you of the reasons why you are choosing a particular financial journey or taking a specific financial decision. Remember, one of the important aspects of financial goal setting is budgeting and that is the process that helps you to keep a tab on your inflows and outflows as well as plug unnecessary gaps in spending.

Goals have to be specific and time-bracketed

Let us talk about specific goals first. Don’t leave room for any ambiguity. You should set clear goals like; I want to have the margin for a car in 3 years or I must have the margin for a home loan in 5 years. You can define that you need Rs.2 crore to see your child through graduation and post-graduation in an Ivy League institution. That is about being specific.

Let us get into the aspect of time bracketed. Goals have to be defined as short term, medium-term or long term. Only then can you straitjacket the right investment mix to the right goal. For example, for a 15-year goal, you can afford to take more risks and you must take higher risks. Hence equity predominance must be the theme. For a 2 year goal, you must be in liquid funds or short-term debt funds. That is being time bracketed.

We will talk about SMART goals in detail as part of the FAQs. However, here is a quick take. A SMART goal is an acronym for goals that are “Specific, Measurable, Achievable, Realistic and Time-based”. That, in a nutshell, captures the gist of goal setting in the financial planning process.

Components of a Financial Plan

Broadly, the financial plan can be divided into 8 sub-components as under.

  1. Financial goals, which is the starting point setting out what you plan to achieve in specific terms

  2. The net worth statement, which is your balance sheet, indicates where you stand and how it looks vis-à-vis where you want to reach

  3. Budget and cash flow planning are more about flows. How much are your flows each month and how you can squeeze more out of each rupee

  4. The debt management plan is the key as you can never create serious wealth if you are stuck with a mountain of high-cost debt

  5. A retirement plan is essential because you are going to live much longer and so your money needs to last much longer

  6. Emergency funds are the safety buffer you can fall back upon in an emergency so you don’t disrupt your financial plan related investments

  7. Insurance cover for life, health, assets, and liabilities are the protection to your plan against uncertainties

  8. Have a will and an estate plan as you need to ensure a smooth transition of your wealth to your dependents

What are the Types of Financial Planning?

You can bracket financial planning under four heads as under.

  • The first is cash flow management, which deals with how you are going to have a budget, plug leakages in spending, and maximizes savings

  • The second is investment management which is all about smart investing to maximize the returns with optimal risk levels

  • The third is debt Management, which entails reducing the quantum of high-cost debt and consolidation of debt into smaller units

  • Finally, there is tax Management, which is about reducing your tax outflow and enhancing post-tax returns. After all, that is what you take home.

Frequently Asked Questions Expand All

If goals have to be meaningful, they must be SMART. That means:

  • Goals must be Specific in terms of outcomes

  • Goals must be Measurable in terms of financial implication

  • Goals must be Achievable in terms of not being impractical

  • Goals must be Realistic rather than putting too many restrictions or austerity

  • Goals must be Time-based i.e., with appropriate milestones

There are different ways to look at goals but the most acceptable is a 3-point classification as under of the term of goals.

  • Short term goals that are achievable over next 2 years. They can include vacationing, paying off a credit card, closing a personal loan, planning for gifts for a wedding etc.

  • Medium terms goals that are achievable over next 2 to 5 years. These typically include goals like margin money for home loan, exotic holiday, saving for a car etc

  • Long term goals like retirement, estate planning and planning for children education that can extend from 5 years to 20 years.