How to Set Your Financial Goals

The main question that almost every investor has is what instrument will bring me the maximum return? But is it the right question to ask?

The basic principles of personal finance advise people to start with introspection. You need to start with financial goals, and not look for high-paying investments.

Financial goals clearly define what you intend to achieve, and you can plan your journey accordingly – where to invest, how much to invest, and set your expectations correctly.

Having well-defined financial goals or sound financial goals will help you create a solid financial plan and ensure that it is executed more effectively to achieve your goals. Here’s how you can formulate a financial  goal:

Set Realistic Goal

The financial goal must be realistic. If a person with a monthly salary of 1 million rupees decides to build a high-rise mansion in the posh areas of South Mumbai, then it will look impossible in this context of high property prices and inadequate income. Only some miracle can help in such conditions.

Even if you stick to your goal of buying a 1BHK but are trying to achieve it in a short amount of time along with other goals like going abroad on vacation and arranging a down payment on a luxury sport utility vehicle, then it becomes unrealistic.

Specific

The financial goal should be clear in the mind of the person. For example, buying a house is a very vague goal.

However, if one is talking about arranging a down payment for a one-bedroom kitchen (1BHK) house in a gated community in suburban Mumbai, then it makes more sense. Specific goals provide an emotional connection to financial goals, and such goals are more likely to be achieved.

Time Bound Goal

The financial goal must be expressed in the context of time. Every financial goal has its price.

But inflation ensures that the price tag changes over time. For example, in the example above, if we assume inflation is 5 percent, then the same house will be available at Rs 89.34 lakh in five years and Rs 98.5 lakh at the end of the seventh year.

Arranging a down payment of 19.7 lakh for a 1 bedroom house in a gated community in suburban Mumbai at a cost of 98.5 lakh after seven years.

A clear definition of the financial goal makes it easier to draw up a financial plan. Savings and investment activities can be prescribed with greater clarity if the person knows what he wants.

Attainable

The financial goal must be achievable. Sometimes goals are not achievable in the near future. However, you can use time on his side to make your goals achievable.

Goals that seem out of reach for people with a very low risk profile can become achievable if some allocation is made to risky assets that offer high returns.

For example, in the example above, for a person with a monthly salary of Rs 1 million and monthly savings of Rs 30,000, the goal seems impossible if one wants to raise the desired amount of money by the end of the financial year. However, if a person takes a little longer, then his goal becomes achievable.

If you need to accumulate Rs 14 lakh by the end of five years and the expected rate of return is 12 percent per year, then you should invest approximately Rs 17,150 per month. These numbers make it achievable in the given context mentioned above.

Measurable

Among other factors, the goal must have a monetary value attributed to it. This helps the person to clearly understand where he wants to go.

Following the example mentioned above, one could say that he will end up buying a house at the price of 70 lakhs. The down payment of 20 percent is Rs 14,000.

Monetary Value allows you to adjust your goals based on how much money you save and changes in the price of financial goals.

For example, you may have a goal of 14 lakhs, but the prices exceed your expectations, then the same must be taken into account in your financial plan.