Financial Goals

The word goal immediately brings to our mind’s eye a goal post as in a football or hockey game. 

Right from our childhood we are used to working with some type of a “goal” in most aspects of life. Starting any work with a realistic, specific goal is the first step to ensure that it gets completed successfully. For instance, in the case of a student it can be completing the school home work by a specific date, the nature and volume of home work is set realistically by the teachers depending on the average student’s capacity. For a home maker it could be completing a particular house hold work like cooking, within a specific time, the nature and volume of work depending on the number of members in the household. For a corporate accountant it could be completing the organisation’s financial accounts for the year within a target date. For the players in a game of football or hockey, the goal is to win the game by scoring more points than the opposition within the allotted time period.

Most of us are aware of SMART goals. SMART is the acronym for: Specific, Measurable, Achievable, Realistic and Time bound. In all the examples given above one can identify the SMART components.

 

Having a goal makes us conscious of completing the job within a time frame. The “goal theory” can be applied in almost all the aspects of life. And this includes Financial Goals as well. In simple words a Financial Goal can be defined as any target that is set in monetary terms.

It is always much easier if we are able to identify the goal in advance. Some very common financial goals can be to have an emergency corpus, to come out of credit card loans (or for that matter any debt), buying own house, making a foreign trip, etc.  

Financial Goals can be classified into short-term, medium-term and long-term goals. Short term financial goal can be having an emergency corpus, medium term can be coming out of debt trap or making a foreign trip and long term can be buying a house or retirement planning.

Needless to mention the SMART components have to be made applicable to Financial Goals too. “Lots of money for retirement”, or “a foreign vacation in future”, or “a big house before I retire” are not SMART financial goals.

Instead “Rs 5 crores at the time of retirement at the age of 60” or “20-day Europe Tour with family in the summer of 2023” or “3 BHK apartment measuring 1200 Sq feet in Bangalore in a budget of Rs 1.5 Crores within 5 years” are proper goals.

 

As in the case of any other goal a financial goal has to Specific, Measurable, Achievable, Realistic and Timebound. Let us take one of the examples given above and analyse how an achievable goal can be framed.

In the retirement example given above the Rs 5 Crores goal can be easily achieved by a 30-year-old person who has another 30 years to go for retirement (see explanation in footnote $ below), but difficult or impossible for a 55-year-old executive / self employed person with negligible present net worth and not much income or receipts in the near foreseeable future. Similarly, for a family with not much resources at hand and with not much monthly surplus in hand (remaining after the routine monthly expenses); a 20-day Europe trip may not be possible in the next year, but they can certainly plan a 10-day vacation at Goa.

When it comes to Financial Goals it is important to be clear and sure about the facts and figures. When planning for a financial goal in a future point of time, near or distant, one has to factor inflation. This is true for all financial goals - higher education, house purchase, corpus for retirement, foreign vacation, etc. A college course which costs Rs 1 lakh per year today will cost Rs 2.14 lakhs per year, after 8 years at 10 % inflation rate. A house costing Rs 2 Crores will cost Rs 2.67 Crores after 5 years at 6% inflation rate. 

 

People normally overestimate their earning capacity in the short term and underestimate the power of compounding in the long term. For instance, there is always a tendency to take loan in the immediate future as a solution for buying a house, without factoring the cash flow issues one is likely to face immediately. However, when it comes to long term, they feel that accumulating a corpus of Rs 5 Crores or Rs 10 Crores is impossible or very difficult.

 

Footnote:

$ - A SIP of 6,500 per month with an annual step up of 10% at 12% return per annum would give a corpus of Rs 5.19 Crores in 30 years!

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