Importance Of Goal Based Financial Planning





Chandan Ghosh
Founder, PW Fund Managers Pvt. Ltd.


Ever wanted to surprise your spouse on the landmark birthday? You will have to plan that out, of course the goal is singular - a fabulous surprise party. How about planning the daily dinner menu for the family? At least two goals here - something healthy and, at the same time, tasty. Now think of planning a 5-day trip to Kerala in your summer vacations. Several goals come to mind, spending a day on the beach, temple visits, tea gardens of Waynad, back waters of Alleppey, historical Cochin, central accommodation and good local food. It would be foolish to imagine that any of the above goals - singular or multiple - can be achieved successfully without planning. At the same time for an effective plan, you need clear goals. If your daily dinner menu is planned in a hurry and includes rice and lentils but no green vegetable, you achieve very little other than filling the stomach. This article, though, is not about surprise parties, vacations or dinner menus, but you can see where this is headed. Any good plan in life requires clear goals and without goals all the planning can end up achieving nothing. Planning yours and your family's finances is no different. If you want a financial plan that delivers, focus on setting the right goals. This is the first and the most important step in financial planning.

Defining Goals Makes Them Real :

Money is fungible. You can use the same `500 to buy food or clothes, to donate to a charitable cause or to invest. Without a plan in place, in all likelihood, you will end up spending it on things that provide instant gratification, rather than something productive. The purpose of financial planning is not only to allocate your surplus funds to earn a return, but also to help you achieve financial growth in a way that you are able to provide monetarily for all the big and small targets you have in life. Your goal can be as vague as financial freedom at 40 or as specific as wanting to educate your child in a top US university in 8 years' time.

Whatever the goal, it must be expressed clearly and assigned some monetary value. By doing so, you are not only preparing your investments today, but also showing yourself whether your desires in life are realistic or not and how important they are for you. Goals need not be just the ones that are crucial to you and your family's wellbeing. Your goals defined in financial terms should also include your desires and innermost dreams. Do you want to own a yatch or a top series luxury car before you retire? Or maybe after you retire, you want to start a mid-day meal programme to feed 1000 children every day. Clearly articulating goals and writing them down brings them to life and lets you know exactly what you want your money to achieve. List your goals with a specific time line and, within that time line, in order of priority and emotional satisfaction.

Stating Goals Helps You Achieve Them : It seems obvious, you have to state your goal in order to achieve it. However, it is more than just that. Defining goals in your financial plan and assigning them a monetary value helps you to understand how you should allocate your funds today to achieve your future goals. You may realise that your goal is too ambitious and you do not have the means at the moment to cater to it completely. This, in turn, brings in the realisation to perhaps save more and cut back on some non-essential spends in your daily routine. On the other hand, you may find that you have more than adequate to cater to the goal already. This means that you can maybe accommodate another goal in your financial plan or perhaps expand your most important desire to include more. This is why stating your goal and then assigning it a monetary value is important. Remember these are future goals and you will start to set aside smaller amounts as investment today which can potentially grow into what you need to achieve your goal in future. This holds true not just for long term goals, but also something you want to achieve, say, in the next two years. Think about this, you may be happy routinely investing 20% of your monthly income. In your long-term goals, you have chalked in retirement and children's education, but next year, you want to make a month-long trip to Europe with your family which is likely to cost you a great deal. Now, should you just take out from your accumulated savings or can you perhaps plan better and allocate specifically to this goal? By assigning monetary value to each goal - long and short term, you will understand whether you need to save more in some periods to achieve certain specific short-term goals like this month-long vacation. After doing the goal-based calculations, it may become clear that you have to save 10% more for the next 12-18 months to achieve this ambitious yet desirable vacation goal. Setting goals can bring the much-needed clarity to your financial plan and what return expectation to derive from it. Depending on how much risk you are willing to take for each of the goals, you will also end up choosing the most appropriate financial product to help you achieve it.

They say if you aim for nothing, you will hit that goal each time. Fill your financial plan with something, let this something be the goals that define you and your life's purpose. Once that is done, bringing in and executing the strategy to achieve your life's goal can seamlessly get integrated with your financial plan.

For more information contact : Chandan Ghosh,Founder, PW Fund Managers Pvt. Ltd. Email: chandan.ghosh@prudentwealth.in Website : www.prudentwealth.in

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