Life is a journey, they say. Well, there’s not much to argue about it. But in a journey, would we fix our destination first and then plan our travel accordingly or would we let traffic conditions guide our destination? The answer is obviously the former. Yes, clarity on where we are and where we want to reach, will lead us to the decision on how we want to travel.
Similarly, we can either decide our financial destination and plan our journey accordingly or let incidental factors decide the destination for us. What do we really want to accomplish with our earnings? After all, we earn for a purpose. Deciding what we want to achieve with our money and then working diligently towards it is more prudent than letting our money ‘do its best’ for our family.
The financial destination is nothing but our financial goals. Financial goals need to be SMART, that is, they should be Specific, Measurable, Achievable, Relevant and Time-bound. Some examples of SMART financial goals are:
Goal 1: To accumulate Rs 10 lakh by 2025 for my son’s college education.
Goal 2: To achieve a monthly income of Rs 50,000 when I retire in 2019.
Goal 3: To keep ready my PF accumulation of Rs 25 lakh for my daughter’s wedding in 2019.
Our investment decisions should be based on these tangible and clearly identified goals rather than news items like prevailing interest rates, stock market conditions, property price levels etc. We need to appreciate that these factors are highly dynamic in today’s globalized world and hence, are not in our control. What is in our control is our earnings, our savings, our borrowing decisions, etc. We can set out to achieve something tangible to suit our family situation rather than trying to outdo our peers’ investment returns or trying to win in the stock market.
How do financial goals help?
One decision that we constantly ask ourselves is, ‘Where to invest our money?’ More often, news headlines and the recent performance of different assets influence this decision. But having clearly defined financial goals makes this decision a rather easy one. Financial objectives derived from the financial goals help us in this decision. For
example, the objectives for the above goals would be:
Goal 1: Capital appreciation over the next seven years.
Goal 2: Income generation over my retired life.
Goal 3: Capital preservation for a few months.
From the above objectives, the investment product or vehicle becomes reasonably clear. While equity- based investments could be a good choice for the first goal given the longer investment horizon and need for capital appreciation, it is totally unsuitable for the other two goals given its volatility. An investment that churns out a reasonably predictable return is what would suit Goal 2 as regular income is what is being desired. Bank/ postal deposits or conservative hybrid equity funds could be the answer. In the case of Goal 3, no risk can be taken with the principal as capital preservation is the key, and not return generation. Parking it in short term deposits or liquid mutual funds could be the best option apart from leaving it in your savings bank account.
To conclude, Rome was not built in a day and neither can your family’s financial future. It needs solid planning with foresight and clarity. Clearly defined financial goals would go a long way in achieving the best result from your earnings. Goal-based investing makes your financial journey more meaningful. In case this seems a daunting task, do not hesitate to take professional guidance.
(The writer is the Founder of Money Mantra, a personal finance solutions firm)