The SMART Way To Plan For Your Financial Goals
Keeping your goal time bound will prompt you to maintain a sense of purpose and urgency when it comes to your overall progress.
It’s quite likely that you work between fifty and seventy hours a week (perhaps even more), and are at least partially motivated by money – especially if you’ve got a family to support!
But if you were to scrape a level deeper and ask yourself – “why do I strive to earn?” the answer would most likely be “in order to achieve one or more Financial Goals for myself and my family”. These goals could range from fulfilling your Child’s Education expenses or buying a house, to the more mundane but instantly gratifying car purchases or family holidays.
Take a pause for a moment and introspect on how well you’re actually planning for these goals. Have you written them down? Have you assigned a well thought out target amount for each goal? Have you prioritized them correctly? And most importantly, are you saving in appropriate instruments in each goal – or simply frittering away the possibilities of accelerated capital growth by blindly choosing traditional instruments? These are just some questions you need to ask yourself regarding your goal planning.
If like most people, you’re a bit lost when it comes to planning for your goals, don’t despair! “S.M.A.R.T” is a simple and easy to recall acronym that will help you organize your future objectives effectively. In other words, make sure your Financial Goals are S.M.A.R.T – Specific, Measurable, Attainable, Relevant and Time Bound.
To make your goal “Specific”, define it as precisely as possible – with no unclear language. “To provide my son with a great education” is a classic example of a nonspecific goal. Noble as it may sound, the goal itself is too sweeping in scope to really inspire any immediate action on your behalf.
Why not define the same goal as “To accumulate the inflation adjusted value of Rs. 10 Lacs (which is Rs. 21.58 Lacs) by the year 2026, for Dhruv’s higher studies”. Such a specific goal definition is the first step to spurring you into action.
Another critical element of Goal Planning is the capacity to actually measure your progress towards the goal, preferably at defined intervals in a disciplined manner and as part of a structured review with your Financial Planner.
Considering that most monthly savings that will compound over time will grow in a nonlinear rather than in a straight line manner, it’s worthwhile to set up pre-defined checkpoints with target amounts based on a hyperbolic (compound interest) growth curve to properly assess your traction, without getting demoralized at the sight of the gargantuan savings mountain that looms in the distance!
For instance; you may have set a target of saving Rs. 5 Crores in 20 years for your retirement. Now that doesn’t mean you need to be at Rs. 25 Lacs (5 Crores divided by 20) at the end of the first year – the correct target amount at the end of the year is actually closer to 6.50 Lacs. A qualified Financial Planner is best suited to help you with your goal tracking.
Traditionally, we’ve been taught to set unrealistic goals and strive hard to achieve them. However, such a quixotic approach is likely to work against you when it comes to planning for your goals.
Ambitious as you may be, your future goals need to reflect today’s reality. If by dint of hard work your financial situation were to change for the better, you could always re-adjust the goalposts and set them further ahead.
Keeping your goals attainable and realistic will increase the chances that you’ll stay committed to going the distance and keeping up a disciplined approach to your monthly savings. Unrealistic goals can come crashing down just as easily, leading to a more reckless “start/stop” approach which essentially entails leaving the attainment of important future outcomes to lady luck’s discretion.
This may sound like a no-brainer, but it’s vital to prioritize your goals in terms of actual relevance. While doing this, consider both long and short term goals, and try to break out of the mental trap of assigning an exponentially relevance to nearer term goals (a phenomenon called ‘hyperbolic discounting”)
If you plan for insignificant goals, it’s quite likely that your sincerity and commitment will diminish over time, leaving you between a rock and a hard place when the time to shell out the moolah for the more significant goals arrives.
For instance, your retirement (which may be far away) is actually a lot more relevant than paying for your child’s education (for which a loan is still a choice, albeit a poor one). Use your discretion and intellect while assessing the relevance of each goal, and ask yourself if the goal you’ve established fits in nicely with your immediate and long term plans.
Last but not the least, leaving your Financial Goals open ended is never a good idea. Your financial objective should have a very clearly defined time limit – preferably in terms of month and year, at least.
Keeping your goal time bound will prompt you to maintain a sense of purpose and urgency when it comes to your overall progress. Also – it will allow you to have a clear ‘get back on your feet’ plan in the undesirable situation of you having to draw on your goal based savings mid way.