Financial planning is all about wealth creation. It is about having enough money for the non-earning years of life. Above all, it is about having money (and enough of it) whenever you need it the most. And, of course, all this is easier said than done. Financial planning is a set-by-step process and in the correct order. The first step is to establish the financial goals. But why is goal setting important in financial planning?
My wife and I are fond of going for long drives. However, there is no specific destination on most occasions. Instead, we go where the road takes us. We wander until we feel good, and after that, we head back home feeling fulfilled.
In the context of personal satisfaction, happiness is all about the journey and seldom about the destination. It is never about where we are going. In other words, it is not the destination that matters; it is, in fact, the experience that we cherish. There will be enough and more such anecdotes from your personal life.
The contrary is true in the case of financial planning. The single most crucial aspect of the financial planning journey is the objective that you want to achieve. In other words, here it is all about the destination.
Read more about the process of how to make a financial plan here.
Goal setting is essential, and the key is to be specific
Begin with the end. Knowledge of the destination (financial goals) help you make efficient and optimum use of the available resources. Therefore, identifying goals upfront is immensely helpful. After that, it is about detailing the ways and means to achieve those objectives.
Split the goals into three different buckets – short term, medium-term and long-term. The time-based split is helpful as you do not want to tag a long-term product with a medium-term goal. Incorrect mapping will lead to sub-optimal returns and falling short of meeting the target.
In addition, you have to be specific in goal setting. A non-specific goal is as good as no goal. For instance, to set an objective like ‘I want to save enough to fund my daughter’s education expenses’ is hollow and meaningless. It does not answer many critical questions like:
- In which year do you require the money or the time at hand?
- How much money is required?
- Do you want to save for graduation, post-graduation, masters or all of them?
- Is the need one-time or spread across multiple years?
A goal without a timeline is just a dream that you hope will come true.
Instead, the goal should read something like this –
Goal date – 1st January 2022. I want to save Rs 30 lacs for my daughter’s post-graduate education. The amount is payable in three equal annual tranches. The first instalment is due on 1st January 2030. Subsequent payments to happen on the same date in the year 2031 and 2032.
In other words, if you begin with an incomplete goal, the chances of missing to achieve them are high. On the other hand, clearly defined goals, time duration, and assumptions of inflation and rate of return will help you formulate a successful savings strategy. Therefore, the chances of meeting that objective are high.
Here are the top benefits of goal setting in financial planning:
- To have a goal makes navigation meaningful. You need to know where you are going
- Plans bring clarity to decisions, what is achievable and what is beyond the wallet can afford
- You adapt to change in the circumstances in your life and, therefore, goal-setting helps you evolve
- Goals enable you to strategize and remain accountable
- The focus is apparent, and it pushes to concentrate on the right thing
- The process urges you to choose the best option and prioritize
In conclusion, setting goals and meeting them provides you with a reason to celebrate.
What does it take to fail?
We want to be successful in creating a successful financial plan. In other words, if you understand the ingredients of failure, success is nearly inevitable. So here are some habits to remain watchful of:
- Postponement of mandatory savings
- Unnecessary delay in implementing the savings strategy
- Not exercising self-restraint in expenditure
- It is overstretching savings while planning, making it impossible to achieve. In other words, grossly underestimating expenses. On the other hand, the reverse is also detrimental
- Missing the long-term perspective – we are talking about 20-40 years horizon
- Remain ignorant and believe in superpowers
Goal-setting helps you better manage the wallet
The rule of thumb is expenditure is equal to total income less planned savings. Quite often, people interchange the placement of outflows and the amount to save, which is disastrous. The single biggest reason is that the quantum of savings is not defined. Therefore, there is no objective measure of whether the amount left after is good or not.
Determining the goals, and therefore the savings required to meet them, is half battle won. Money at disposal reduces, which pushes you to prioritize expenses. A short-term temptation for an impulsive purchase gets curbed or at least gets rationalized.
Urge to meet the goals demands deployment of risk management tools
With the target in mind, you will mobilize the right amount of savings to meet the target. After that, you will begin to think about the deterrents (or the risks) and circumstances that can prevent you from meeting those goals.
The visibility of goals and risks that could prevent meeting them is beneficial. It will eventually push you to think about ways to mitigate those risks. Some of the most effective risk mitigation options are:
Create an emergency corpus
Have an emergency corpus to relieve you from any immediate cash burden due to an unexpected outflow. Life is full of uncertainties, and you need liquidity.
This fund will help you tide over circumstances like a temporary job loss, business slowdown, medical expense, etc. In addition, if you are the primary earning member, the need for such a resource will be even high if something happens to you.
Emergency Corpus = 12 to 18 months of living expenses.
A survey conducted by Spending Behaviour in India shows 60% of Indians have less than Rs 5,000 in their savings. Moreover, almost 90% of young Indians have less than Rs 25,000 in their emergency fund. That is an alarming statistic. Therefore, create an emergency corpus to meet any untimely requirements without disturbing the overall plan.
Hold a Mediclaim policy
A Mediclaim is insurance against the medical expenses incurred on hospitalization or treatment of a medical situation. It covers:
- Hospitalization expenses
- Treatment of critical illnesses
- Medical costs incurred pre and post hospitalization
- Specified day-care treatments
Health insurance will support you/your family to meet the financial requirements during medical emergencies. Often, having to arrange funds on an immediate basis can be worrisome. In such cases, a cashless Mediclaim policy comes extremely handy. Read more about the Mediclaim policy here.
Buy term insurance
Term insurance is the purest form of life cover and is the most conventional form. Term insurance involves the payout of the sum assured as a lump sum in case of the insured’s death. The idea here is not to earn. Instead, the objective is to secure the family financially.
Term insurance value depends on several factors, like income status, family background, dependents, etc. Know more about how much term insurance is required to be able to plan for it.
Term insurance can also ensure a specific purpose gets fulfilled. For instance, one goal can be for a child’s education. For example, say you want to save Rs 40 lacs for a child’s education and need the money after 25 years. So, buy a term insurance policy to meet this goal in addition to the savings you are making to meet this objective. In case anything happens to you, your family will receive the sum assured. They can meet the goal with the amount received.
Another example is buying term insurance equal to the mortgage loan you availed to purchase the house. In case of the untimely death of the primary earner, insurance receipts get used to paying the outstanding loan amount. This way, the family members will become house owners and are not left vulnerable.
Start now – it’s neither late nor early
The current circumstances have an impact on the financial goals. And, you should create objectives and assign values based on the present-day conditions and asks from the future.
However, goals are not cast in stone. There will be a need to amend plans, add new ones, or delete no longer relevant ones.
In conclusion, it is about the process. Setting up goals mark the beginning of the financial planning journey. Goal-setting gives meaning and direction to your financial decisions. Therefore, goal setting is essential in the financial planning journey.
Happy goal setting!
About the author
The author is a senior finance professional with over fifteen years of work experience in corporate finance. He has an affinity for matters relating to personal finance and investment management. Through his writing, the author wants to share his knowledge and understanding of the subject.
The author has used his knowledge, experience, and understanding of the subject and has exercised extreme caution to avoid possible mistakes. However, the author does not take any responsibility for any error that exists.
Any views, opinions, and thoughts mentioned in the article belong solely to the author and not necessarily to the author’s employer (past or current), organization, committee, or other group or individual.
Under any circumstances, the author shall not be liable for any views or analysis expressed in this note. Further, the opinions expressed are not binding on any authority or Court. We advise readers to consult their financial advisor for assistance in their specific case.