Financial planning starts with setting clear and realistic financial goals. Whether it’s funding and financially securing your child’s future or finally owning that dream house, every financial dream requires a well-thought-out plan of action. Before you can execute your plan, however, you need to specifically define your targets and in this blog, we’ll help you figure out how to do just that. We will find out how financial goal management can help you turn your dreams into reality, understand what financial goals are and look at their different types with examples. We will also lay down a step-by-step process detailing how you can set your financial goals.
What are Financial Goals?
Let’s begin by understanding financial goal meaning:
- Financial goals are the targets you define to achieve your financial dreams.
- They help you make informed decisions to achieve your desired financial milestones.
- They take into account various areas of personal finance, such as income, spending, saving, investing, and protection.
- Each financial goal addresses three key aspects – its underlying purpose, the specific amount of funds required to achieve it, and the anticipated timeframe within which the goal is expected to be achieved.
- Through financial goal setting, you can allocate your resources efficiently.
- By setting and regularly assessing your financial goals you make sure that you stay focused on building wealth and managing debt.
- Some examples of financial goals are – building an emergency fund, buying a new car, planning for your child’s wedding, cutting debt, and building a retirement nest egg.
- A financial goals planner can help provide valuable insights about financial goal planning. He can help you track your progress effectively and regularly, and adjust your financial goals based on changing circumstances.
Types of Financial Goals
There are many kinds of financial goals, but to clearly understand how to prioritise them, we can classify them into three types –
- Short term financial goals
- Medium term financial goals
- Long term financial goals
Understanding the types of financial goals is important for creating a balanced and comprehensive financial plan. Let’s dive into each type for a more detailed understanding –
Generally, short term financial goals have a time horizon of less than one year. These goals are focused on immediate needs and are important in building a strong foundation for your financial planning. They contribute to immediate financial stability and create a buffer against unexpected expenses, for example, having an emergency fund prepares you to deal with unexpected expenses such as medical bills or a situation such as a loss of employment. This helps you stay financially stable and prevents you from taking debt or hindering progress. These goals have comparatively smaller scope and are easier to achieve. Some examples of short term financial goals include building an emergency fund, paying off credit card debt, or saving for a vacation.
When you achieve your short term goals, you also get a confidence boost which helps you stay on track to achieve bigger goals.
These goals are bigger in scope than short term goals and hence require much more commitment and planning. Typically, medium term financial goals take 1 to 10 years to achieve, so they bridge the gap between short and long term goals. To reach medium term goals smoothly, you will have to first achieve some short term goals, as they will give you the stability to fully commit. Try to understand this with an example. Imagine you have to save Rs. 20,000 each month for 5 years to make a downpayment on a house. To effectively save that amount, you will have to create a budget, have no or low debt, and have an emergency fund. All of these are short term goals. If you are hit with an expensive repair or a loss of job, you might not be able to save the 20k you need each month, so it’s important to work on all your financial goals systematically. Some examples of medium term financial goals are funding your child’s education and starting a business.
Long-term financial goals have a time horizon of a decade or more and are focused on achieving big objectives that contribute to your financial security and independence. Among the many long term financial goals, saving for retirement stands out as one of the most common and important goals that one pursues. These goals require a disciplined and consistent approach to saving, investing, and financial planning. You have to regularly reassess your goals and adjust your strategy based on life changes, market conditions, and other economic changes.
Examples of Financial Goals
There are many different goals one strives to achieve in life. Some of the most common financial goals examples are paying off debt, saving for a new car, funding a child’s higher education, starting a business, travelling, and building a retirement corpus. Let’s take a closer look at a couple of them for a better understanding of goal planning:
Example 1 – Retirement
This is a long term financial goal that one should start planning for as soon as possible. Long term investing benefits from the power of compounding interest, so the longer you stay invested the more your wealth will grow. On top of that young investors can take more risk by investing in equities and generating higher returns. To set this goal, you have to envision what kind of life you want in your golden years. Do you want to travel the world, or do you simply want to enjoy peace of mind with your family? Doing so will give you a good idea about how much you need to save to live the post-retirement life you desire, and enable you to plan accordingly.
Example 2 – Funding your child’s higher education and wedding
Every parent has to think about financially securing the future of their child the best they can. This includes giving them the best education possible and planning for big life events such as weddings. This can be classified as a long or medium term goal, depending on where you are in life. Higher education can be expensive, and you would want to avoid going into debt to fund it. Similarly, weddings are expensive affairs, and they will only get more expensive in the future. If not planned properly, this can cause one to fall under the burden of heavy debt and cause financial stress so again, starting early can give you a big advantage as you can identify suitable investment plans that align with your financial goals.
Steps to Set Your Financial Goals
Effectively setting financial goals requires a thoughtful and strategic approach. Here are steps to guide you through the process of goal setting –
An honest self-assessment is the first step in setting meaningful goals. Understand your current financial situation by taking a thorough look at your income, expenses, savings, assets such as properties or investments, and liabilities such as education loans or other debt. Evaluating these aspects will give you a clear picture of your financial standing. If you subtract your total liabilities from your total assets, you will also get your net worth. While it isn’t necessary to calculate your net worth, know that it is a powerful metric for understanding your overall financial health. It will enable you to set realistic and meaningful financial goals and also help you to track your progress over time.
Define Specific Goals
Your financial goals should be clearly defined. You can do this through SMART goal setting. SMART stands for Specific, Measurable, Attainable, Relevant, and Time-bound. A clearly defined financial goal increases the likelihood of success. Let’s take an example. An unclear financial goal would be “I’ll start saving money next year.” To make it more specific, one might say “My goal is to save Rs. 4000 every month for the next 12 months to fund a solo trip.” Just like that, the goal has transformed into a SMART goal. You know why you’re saving, you know how much you’re saving, and you know how long you have to save. An important thing to remember here is attainability. When you’re setting your goals, you have to be realistic. If you set unrealistic or unfeasible targets, you might not achieve them. This will demotivate you and lead to frustration, disappointment, and a sense of failure.
Next, you should clearly prioritise your financial goals. For example, you will have trouble regularly contributing to your retirement accounts such as the Public Provident Fund if you don’t build an emergency fund in the short term, or get adequately insured in the medium term. Unforeseen expenses will inevitably come up and if you are not prepared to meet them and nip them in the bud, you will lag behind on your monthly contributions that focus on your long term goals. This is why staying prepared is key. Remember, for the most part, you will be working toward your financial goals simultaneously, but give more attention to the immediate requirements. So prioritise your financial goals based on urgency and importance. Doing so ensures that you allocate resources efficiently and address critical needs first.
Create an Action Plan
Develop a step-by-step action plan for each financial goal. A goal such as buying a house can be daunting because there are so many steps involved, but if you break down large goals into smaller, more manageable tasks, it will be easier to track progress and stay on course. You will have to form different strategies to achieve different goals. For example, you may achieve your short term financial goals just by saving regularly, but medium and long term financial goals require different strategies, such as investing. Another example is how you manage debt. You can explore various strategies such as debt consolidation, and build your repayment plan. Basically, each goal demands a different approach, so it’s important to tailor your plan of action to each goal.
Monitor and Adjust
Setting financial goals is not a set-and-forget process. It’s a dynamic and ongoing journey that requires continuous monitoring and adjustment. Let’s take another example. Imagine you get promoted or change your career and your income increases. If you were planning to save for a Rs. 20 lakh down payment, now you might think you can afford a more expensive house. Accordingly, you will have to readjust your savings target. There are many ways life can change – you might add new members to your family, get affected by health issues, the market conditions might change, and economic policies may evolve. You have to regularly review and adjust your financial goals as circumstances change. Generally, people review their financial plans annually to adapt to evolving situations.
Financial goals are more than just your dreams, they are the stones upon which your financial plan is built. Needless to say, this foundation has to be strong if you want to achieve your dreams and navigate the uncertainties of life with ease. These goals can be broadly categorised into short term, medium term, and long term goals, and each goal plays a crucial role in shaping your financial journey. The strength of this foundation lies in the clarity, specificity, and realism of your goals, coupled with a disciplined commitment to your financial plan. But your job doesn’t stop there. You have to regularly monitor and readjust your goals as circumstances change. A certified financial advisor can be an invaluable partner and he can further enhance your goal planning and financial management strategy. Sometimes, your goals may seem like a distant dream, but keep going. Be positive and disciplined, and slowly but surely, you will turn your dreams into reality.