There is so much focus on financial goals these days. It’s almost as if you cannot begin to invest before telling your financial advisor what your goals are. It would be good idea to have your list of financial goals ready before you settle down to investing your savings.
Some of your expenses may fit into your regular income. Some may not. They may require advance planning and need to be provided for by saving or borrowing. Such requirements of money can be called financial goals. They occur in the future and have to be defined in terms of how much would be needed and when.
How should you define your financial goals? If your list runs like this: I would like to go for an international holiday when I have the money. I will buy a swanky car when I get promoted. By the time I retire, I should own a second home in my village. You may have to do better than that. A goal has to be more carefully defined, or be ‘SMART.’ A ‘smart goal’ is specific, measurable, attainable, realistic and time bound.
The goal to take an international holiday becomes specific, if you identify where you would like to go. Going to Bangkok is not the same as going to Switzerland. You can make it measurable when you estimate the cost involved. Many of us are scared of making this estimate, but we have to make it anyway. Your goal is attainable and realistic based on how much you earn and save. You may have a European tour in mind, but if you earn Rs. 20,000 a month and save 10 per cent of it, you will need 60 months before being able to buy a plane ticket. That is why you need a definition of time, so you can plan where to go and how much to spend, based on what you actually earn and save. A smart financial goal will read as follows — I should be able to take a holiday to Bangkok in 2014, and spend Rs. 3 lakh on it.
There are several things to consider when you create your set of smart goals. First, if Rs. 3 lakh is adequate today, it may be inadequate by the time you actually take the holiday. Inflation is a silent killer. You have to provide more than it costs to go to Bangkok today. Second, not all goals need saving — you may be tempted to borrow instead. That will lead to instant realisation of the goal, but assets you will build in the future are sacrificed, since you will be paying an EMI for this loan. Your goal will then be attainable, but at a high cost. Third, your ability to save and invest can change over time. If you opened a recurring deposit for Rs. 1000 for your son when he was born, by the time he is 10 years old, your ability to save should have ideally increased.
Your goal value and how realistic it is, can change with time. So how ‘smart’ are your goals?
Taruna Changulani is a chartered accountant; Director and co-founder of the Centre for Investment Education and Learning, Mumbai. Email: firstname.lastname@example.org