There is a quote by an anonymous writer that says, “Goals are as essential to success as air is to life.”
This statement is especially relevant to financial success and how it relates to financial goals. The way to succeed financially is to frequently set and accomplish personal finance goals.
Where are You Financially?
It is hard to get somewhere, if you don’t know where you are, in the first place. And with personal finance, it’s just as difficult to set financial goals for the future, if you don’t know where your finances are currently.
The best way to measure your financial standing, is to figure out your Personal Net Worth. Personal Net Worth is basically your personal finance bottom line. After taking into account all of your assets and all of your liabilities, what you end up with is considered your Personal Net Worth.
First Step in Personal Financial Planning is balance; not only in your investments, but in your spending.
For instance:
Don’t ignore your health insurance, so you can afford to lease a Mercedes.
Don’t ignore the roof repair so you can buy a 52-inch plasma television.
Don’t ignore the taxes so you can take a trip to Bali. Don’t cut back on vitamins so you can splurge in restaurants.
Second Step in Personal Financial Planning, is choosing and following a course, toward achieving your Long-Term Financial Goals.
As with anything else in life, without financial goals and specific plans for meeting them, you will just drift along and leave our future to chance. A wise man once said: “Most people don’t plan to fail; they just fail to plan.”
End result is the same and it is a failure to reach Financial Independence.
Third Step in Personal Financial Planning is learning how to build a financial safety net, which is like to having a retirement fund for, when you are no longer generating any income.
Four Simple Steps for Setting Financial Goals
Step 1: Determine Goals : Identify and write down your financial goals, whether they are saving to send your kids to college or University, buying a new car, saving for a down payment on a house, going on vacation, repairing your credit, paying off credit card debt, or planning for you and your spouse’s retirement.
Step 2: Determine time frame : Break each financial goal down into several short-term (less than 1 year), medium-term (1 to 3 years) and long-term (5 years or more) goals; which will make this process easier.
Step 3: Determine Current Cost : Educate yourself and do your research. Read Money magazine or a book about investing, or surf the Internet’s investment web sites. Do not be afraid of the Stock Market.
Yes, there is a potential for loss, but if you do your research and get a trustworthy Financial Adviser, you can ensure your financial future. Just remember not to put all of your eggs in one basket.
Diversify your portfolio. With a little effort, you can learn enough, to make educated decisions, that will increase your Net Worth many times over. Then identify small, measurable steps you can take to achieve these goals, and put this action plan to work.
Step 4: Determine the cost of achieving the goals then : Evaluate your progress as often as needed. Review your progress Monthly, Quarterly, or at any other interval you feel comfortable with, but at least Semi-annually, to determine if your program is working.
If you’re not making a satisfactory amount of progress on a particular goal, re-evaluate your approach and make changes as necessary.
There are no hard and fast rules for implementing a financial plan, for achieving your goals. The important thing is to at least do something as opposed to nothing, and to start NOW.
Step 5: Determine the After-Tax Rate of Return for Investments made today
This is another assumption you need to make – how much your investments would return if you invest today? Also, it is important to assume an after-tax rate of return, because that is what you get in your hands for spending!
Step 6: Determine the per-year and per-month investments needed
For this, you need to discount the “Cost Then” using the “Rate of Return”. In simple terms, it means:
How much money you need today, so that it would grow into an amount equal to “Cost Then”, if invested at a rate equal to “Rate of Return”.
The formula for this is a variation of the compound interest formula:
Principal = Amount / [{1 + ( Rate / 100 ) } ^ Years ]
For us,
Principal = Lump-sum amount to be invested now
Amount = Cost of achieving the goal at the target time
Rate = Assumed rate of return
Years = Years till the achievement of the goals
Finally it turns out to be in the following format:
| Sr. No. | Goal | Cost Now | Years From Now | Cost Then | Rate of Return | Amt Needed Now | Amt Needed Per Year | Amt Needed Per Month |
| 1 | Buy an apartment | 30,00,000 | 23 | 9214571 | 18% | 204734 | 37690 | 3141 |
| 2 | Buy a car | 5,00,000 | 4 | 568238 | 6.65% | 439225 | 128650 | 10721 |
Step 7: Start Investing
Now that you know exactly how much you need to save each month for each of your goals, what are you waiting for? Go ahead and start investing!!
You can make the monthly investment needed through a mutual fund Systematic Investment Plan (SIP). If you have multiple goals, as you would in real life, you may combine the monthly investment needed for 2-3 goals and invest them together in a good MF SIP.
Happy investing!
Illustration:
Here is a table indicating the yearly and monthly savings needed if the goal of buying the house is 5, 10, 15, 20, 25 and 30 years away. Again, we assume the rate of inflation to be 5%.
| Sr. No. | Cost Now | Years From Now | Cost Then | Rate of Return | Amt Needed Now | Amt Needed Per Year | Amt Needed Per Month |
| 1 | 3000000 | 5 | 3828845 | 18 | 1673623 | 535188 | 44599 |
| 2 | 3000000 | 10 | 4886684 | 18 | 933672 | 207756 | 17313 |
| 3 | 3000000 | 15 | 6236785 | 18 | 520872 | 102301 | 8525 |
| 4 | 3000000 | 20 | 7959893 | 18 | 290581 | 54286 | 4524 |
| 5 | 3000000 | 25 | 10159065 | 18 | 162108 | 29653 | 2471 |
| 6 | 3000000 | 30 | 12965827 | 18 | 90436 | 16393 | 1366 |
If the goal is 30 years away, you need to set aside a very modest sum of Rs. 16,393 per year. But if the goal is 10 years away, you have to set aside a hefty sum of Rs. 2,07,756 every year.
This example illustrates that the earlier you start saving, the better is the effect of compounding, and therefore, the lesser is the money that you need to invest. Time has a disproportionate positive effect on your returns.
Note:
The calculations that you would do depend on two very important assumptions:
- Expected rate of inflation
- Expected rate of return
Please note that both these need to be assumed as accurately as possible, as even a little change in these, can vastly impact the amount needed, to be invested every month, especially for long-term goals.
Sometimes when people write down their goals, they discover that some of the goals are too broad in meaning and nearly impossible to reach, while others may seem smaller in scope and easier to achieve.
It is okay to dare to dream about riches, but be realistic about what you can actually do. A good idea is to break your goals down into three separate categories of time.
One more thing to remember: by placing a time frame on your goals, you are motivating yourself, to get started and helping to allow you the chance to succeed. Just remember that you can adjust the time frame whenever you want to.
Long-term goals (over 5 years) are those things that won’t happen overnight, no matter how hard you work to achieve them.
They make take a long time to accomplish (hence the reason they are called long term goals), so give yourself a reasonable amount of time, that are based on your best estimates of what it will take to achieve them.
Examples of long-term goals might include college education for a child, retirement plan or purchasing a home. Whatever the case, these goals generally require longer commitments and often more money in the end.
Intermediate-term goals (1-5 years) are the type of goals that can’t be executed overnight but might not take many years to accomplish. Examples might include purchasing/replacing a car, getting an education or certification, or paying off your debts like credit cards etc. (depending on the amount).
Short-term goals (within one year) generally take one year or less to achieve, based on the date the task is needed, the total estimated cost, and the required savings.
What are your goals? To find out, you need to make up a list, decide which timeline your goal fits into, detail the steps necessary to achieve your goals, then take action toward reaching those goals. It’s that simple.
Summary : Simply saying “I want to have a million dollars”, does not make it an achievable personal financial goal even though it involves money and your personal desires. It’s not achievable until you know how you’re going to do it.
To make dreams into actionable goals (and therefore achievable goals), consider the SMART format of goal-making.
•Specific
•Measurable
•Attainable
•Relevant/Realistic
•Time-Bound
So, spell it out. Set a Rupee amount you want to achieve. Remember that just because you want it, doesn’t mean it’s possible. I mean, I’d love to be a Multi-billionaire too. And finally, set a time limit on getting there.
For each lofty (yet realistic) financial dream you have, you need to go through the same steps:
1.Calculate roughly how much you will need.
2.Work out a realistic time frame for getting it.
3.Turn that amount into a monthly or weekly financial goal. 4.Plan your steps for achieving that goal.
5.DO IT!
Now, let’s take a quick look at some everyday financial dreams and work through how you can personalize them and make them achievable goals.
“I want to have money for my retirement”
A commendable goal! So, work out what you will need. There are plenty of online retirement calculators which will let you enter in your current age, your expected retirement age and how much you want to have per week in your retirement. They use average life expectancies, work out all the interest payments you will earn on your savings for you and ultimately calculate an amount you need to put aside each week from now on.
The online calculator does all the hard work for you. Now you just have to work out how to either save or earn that much extra money per week. Your plan of action will need to be well thought out. The good news is it’s probably not impossible and the sooner you start the better.
“I want to travel somewhere nice once a year”
Holidays cost money. Consider your last holiday and work out how much it cost you. Add a little extra to your total to cover things you forgot and any contingencies. Divide this amount by 52 to get your weekly figure (or divide by 12 for your monthly figure). Now you know exactly how much you need to save for your holiday. Your financial goal is set. Now plan your steps to save or earn that much extra and you’ll be ready for your holiday when it comes.
Before you take an aim, you need to know what you are shooting at. Shooting in the dark won’t get you anywhere. You need to start by prioritizing your goals and determining their urgency. The matrix below is a good starting point.
What exactly are high priority and low priority goals? Low priority goals wouldn’t affect your life in a big way even if you fail to meet them. Whereas, high priority goals are critical to your life and financial well-being.
An example of how your personal financial goals matrix might turn out is presented below.
Emergency Fund
Emergency fund is a short-term high-priority goal because it can occur unexpectedly and requires immediate attention. Car repairs, home repairs, job loss and any health-related disability are examples of emergencies that you might encounter. The amount required for each of these emergencies is something for you to figure out. For instance, you might like to save 6 months of salary to help you through a job loss.
How Fast Should My Money Grow?
To combat inflation and to meet your personal financial goals, your money should grow at a certain rate. This rate is commonly known as rate of return. Only after you have calculated your rate of return, can you figure out when and where to invest your money. So, how do you calculate your rate of return?
7 Steps to Calculate Your Rate Of Return?
1. Gather information on sources of income and savings till date. Don’t forget to estimate the increase in your income due to promotions, inheritance and other windfall gains as best as you can.
2. Gather information on your financial obligations and debt. Don’t forget to estimate future expenses (EMIs) on home loan, car loan and loans to meet other personal financial goals.
3. Use the Retirement Calculator, available at various websites, to calculate your Retirement Age.
4. Define an amount you can save every month as a percentage of your salary so that the amount you save can increase with promotion.
5. Plot your sources of income above the axis and your financial goals below the axis as shown.
The two sides of the axis roughly represent the equation: Money saved and grown = Financial Aspirations.
In case you are wondering why pension is listed below the axis, it is because pension is a financial goal which is paid for by money that you save in youth. The big single arrow represents sudden deposit or withdrawal of income, while the smaller continuous arrows represent continuous inflow and outflow of money. The size of the arrow should roughly be proportional to the amount of money. For instance, the sudden down payment of loan or savings in bank is represented by big arrows. In contrast, money saved from your salary every month and interest payments for car and home loans are represented by smaller and continuous arrows.
6. Now you can calculate the rate of return on your investments. You can calculate the rate of return, using Free financial calculators available on the internet
7. Adjusting for Inflation: Calculate the rate of return and add inflation to it to get the required rate of return.
This graph will look different for different people. The above graph shows a 35-year-old man, who plans to own a home and car. He gets a promotion every 5 years, plans to retire at 55 years of age and hopes to live till the ripe old age of 85 🙂 .
Please share your feedback for the article, by leaving a comment.
Bharat Sahni
PlanUrMoney 