By Sunil Dhawan
It is always better and easier to plan one's journey after choosing the destination. For, a planned itinerary certainly helps in making an efficient and optimum use of the available resources. Similarly, life goals need to be identified upfront before one starts saving towards them. Set your goals in sight and create a separate plan to achieve each one of them. Remember, goal-setting is only a part of the overall financial planning process which entails meeting life goals through the proper management of finances.
Goal-setting starts with identifying various short to long-term goals. While saving for an expense such as annual vacation or buying furniture in the next 12 months may be a short-term goal, saving for home loan down payment over the next 3-5 years may be one's medium-term goal. Long-term goals may include child education, marriage needs or funding one's own retirement.
The identified goals need to be well-defined by assigning them some value as well as setting a time horizon to achieve them. There should be clarity about the goals that your wish to achieve. It also helps in proper linking of the goal to an investment. An attempt to meet a medium-term goal by linking it to a long-term product may not yield the desired result.
If one plans and sets the goals in advance, managing and controlling one's finance is easier. Any short-term temptation to divert funds towards immediate and discretionary needs gets curbed. Impulsive buying may also take a back seat. Setting goals in advance helps in proper utilization of available resources, i.e. investable surplus. It gives you the reason to follow the approach of 'Income minus saving equals to expenses' rather than 'Income minus expenses equal to saving.'
Life insurance goals
Once the goals are identified, the role of risk management tools such as life insurance gains importance. The goals that you wish to achieve through life insurance by linking them to it is an important financial decision. Life insurance (savings-oriented), for example, is a long-term savings product. Hence, the goal one wants to achieve through it also needs to be long term. The importance of goal-setting, therefore, is an important step before one starts to save through life insurance.
Life insurance helps in mitigating the risk of not meeting long-term goals such as children needs. If, for example, one starts to save for children needs through life insurance, the commitment to divert savings towards the goal continues till it is achieved. In case of an untimely death of the parent, life insurance plays its part and secures financial requirement of the child. So, if your goal is to save a specific amount to be used by your child when he/she attains a certain age, a child-oriented life insurance plan may be a better alternative to achieve it even in the absence of the parent. Goal-setting thereby helps in safeguarding you and your family against any financial crisis in the event of death or disability when your financial dependants need your financial support the most.
A comprehensive goal-setting process would start by establishing the current financial state of the individual by gathering relevant financial information. This helps in putting realistic goals and values in place. Thereafter, identifying and estimating the requirement after adjusting for inflation takes place. A post-graduate course costing Rs 9 lakh today may cost more than double in 15 years! Lastly, one has to come up with a strategy or plan for meeting the goals under the current situation while keeping the future goals in mind. The choice of the asset-class or the investment product comes last in the process. For better results, one may take the assistance of a financial planner while undergoing this exercise.
The process of goal-setting may have its own share of challenges with procrastination being one of the biggest challenges. For instance, there could be a change in the financial position or life situations may also change. Delay in the goal-setting process could cost you heavily as you would lose on the benefit from the power of compounding. There is a possibility of over or under-saving as well with resources not being utilized optimally. It is therefore better to be prepared to face the uncertain future well in advance.
The other challenge could be to sacrifice today for a better tomorrow. For example, a small amount of savings can create a sizeable amount of wealth over time. But unless the goals are well-defined, investing might not be of much help. A few common mistakes during the exercise could be setting unrealistic goals or looking for quick-fix financial solutions instead of a long-term strategy. Also, at times, one may start expecting unrealistic returns on investments while ignoring the basics of each asset-class.
Setting of goals marks the beginning of financial planning to help you achieve the objectives at various life stages. Goal-setting gives meaning and direction to the various financial decisions you will take during your lifetime. A common misconception among most investors is to consider financial planning similar to investment planning, which in reality is only a part of the former. Keeping all these factors into consideration, one needs to start the process of goal-setting without any delay.
Source: Economic Times
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