Each one of us has dreams which we want to achieve. Unless we commit and persevere to achieve our dreams, they don't occur in reality. Whether personal or financial, setting goals helps us in defining what we want and taking small steps towards achieving the same.
Setting specific, financially viable goals and managing personal finances to achieve the goals forms the very core of financial planning.
Here are four easy steps on how to go about planning and achieving your financial goals:
Define your goal
Defining your goal is the first step towards achieving it. Goal setting involves setting objectivity to the investments we make. Some common goals we set are: buying a car, buying a home, education/marriage of children and a happy retirement.
All goals can be classified in two categories: one-time events and recurring events. For example, events like child birth, marriage, buying a car/home can be classified as one-time events as these require one-time bulk cash. Whereas, goals such as education of children or retirement can be classified as recurring events as they need a recurring cash flow for years.
Identifying financially viable goals and classifying them is the first step towards goal planning.
Set the time frame for your goal
After defining goals, we need to define the timeline for each goal. Timelines along with our risk appetite would help in deciding on appropriate financial planning. Goals which need to be realised in less than a year can be termed as immediate-term goals whereas goals which need to be realised in a time frame of 1 - 3 years can be termed as short-term goals. Medium term goals have a time frame of 3 - 7 years while goals with a time frame of over 7 years can be termed as long-term goals. Defining goals according to the time line can help you develop a roadmap with important milestones to be achieved on the way.
Assess the financial corpus needed for your goal
It is a common financial planning practice to assume the corpus needed for your goal in today's value and adjust the value to inflation, also known as time value of money. After considering the rate of inflation, we should focus on the time required to achieve a goal and the type of goal to determine the total corpus needed. For example, consider a one-time goal, such as down payment for a home, which you want to achieve in 3 years from now. To calculate the corpus needed to achieve this goal in 3 years, you should consider the corpus needed for the down payment at current value and adjust it to the inflation rate, which is simply the rate at which things become expensive.
In the case of recurring goals, individual cash flows are adjusted to the rate of inflation. For example, consider the goal of saving corpus for your child's higher education where you would need to pay a fee of Rs 1 lakh every year for 4 years. Let us assume that the child will be starting higher education in 5 years from now. Here, the first year fee is adjusted to inflation considering a time frame of 5 years, and the fee for second year is adjusted to inflation considering a time frame of 6 years and so on.
Prioritise your goal
All our goals are not of similar value or importance. Despite fair planning, it is still possible that we may not be able to achieve all our goals. When it comes to trading off among various goals, we should give high priority to the ones which are of a higher importance than the rest, for example- child education, home etc. Similarly, some goals can be given low priority, buying an expensive car or planning an international holiday, for example. The idea here is to increase the likelihood of achieving important goals. Prioritising is done by ranking all our goals based on the order of their importance.
The steps given above form the very core of financial planning. One should take professional advice in developing a foolproof financial blueprint and lay a solid foundation for a stress-free financial future.
ArthaYantra.com provides personal financial advice online.
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