Set smart financial goals and let them scream out to you everyday
Ask anyone about his financial goals and you will probably encounter a blank face and hear the wheels cranking noisily in his head. Most people have never given financial goal-setting a thought.
Most people will also tell you what returns they got in their latest share transaction, but will have no clue on their portfolio returns. In fact, I do meet people who have not even made a list of their portfolio!
Forget specifying actionable goals, they have not even seriously considered what things they desire. They may fantasize vaguely that a family vacation in Egypt ‘some time soon’ is a swell idea, but planning for it is left to a moment of inspiration.
Very few people acknowledge a rather obvious truth that unless you begin planning ‘some time’, the probability that your goal will never be attained is terribly high. So, how does one set goals?
Here is the sample of what you will get if you make three people at random pen down their goal statements:
● Provide my child with the best possible education.
● Own a fleet of my favourite cars.
● Visit Bahamas with my husband/wife.
These might sound like goals at first look, but actually, they are just dreams. The difference between dreams and goals is that dreams are not SMART — Specific, Measurable, Actionable, Realistic, Timely. Let’s look at what each of these terms mean:
Specific
Specify the financial implication of your goal and the timeline by which you wish to achieve it. How will you calculate required savings every month if you do not know the amount you need to meet your target?
Ballpark figures just don’t work. This is because you will have to plan so finely that if your initial figure is not correct, the closer you get to your goal, the more likely things may go wrong. Murphy’s Law! So, you need to build your buffers and risk strategies too. And for this, you need a precise figure.
Measurable
Devise a means of knowing how far you are in reaching your goal. This begins with spelling out the financial element. Now, you can work backwards from the financial end and create frequent intermediate goals. If you are going to need Rs 5 lakh at the end of next two years, check every month if your corpus is growing in that direction.
A system that measures against a target every month will keep you from straying much more effectively than a system that checks on you after a year has gone by.
Actionable
Attaining your goal has to be in your control. Do not aim at something that requires alien intervention to happen.
Realistic
Your goal must be achievable, even by you. To have Rs 1 crore in investments by the age of 35 might be realistic for some, but in a majority of cases, it is a lot of hot air.
Then again, a bigger goal is sometimes easier to achieve than a smaller one. Why? The more attractive your goal, the more motivated you are to work at it.
Timely
Your goal must come with a sensible timeframe. Think about it before you put it down. Over optimistically short timelines will only demotivate and make you give up early. So, what would a great goal statement look like? Consider the following:
● To buy a 2bhk apartment worth Rs 105 lakh in Kharghar in the next five years with 50 per cent of my own money and the rest financed with a home loan.
● To take a guided tour of Europe in 2022, at the cost of Rs 11 lakh, financed with my own money.
Now, these are good goals and you can work backwards from them in a precise manner. Once you have these down in front of you, the next important step is to rank your goals. Out of your wish list, you will have crucial and non-crucial goals.
Crucial goals are things you cannot compromise on. They are not optional. Which is why you might want to have your own corpus to fund them, as borrowed money may bring uncertainty. Non-crucial goals can be downsized if they seem unattainable. You can also risk borrowing for them. In essence, non-crucial goals are luxuries or wants, while crucial goals are necessities. Rank necessities the highest and rank luxuries lower. For example,
● Building a retirement corpus of Rs 250 lakh by 2030.
● Spend Rs 15 lakh on my daughter’s wedding in 2028.
● Buy a second house worth Rs 150 lakh in 2031.
Remember, a resolution becomes most powerful when you articulate it, write it down, shout it out loud and stick it up all around your house and office. Let it scream out to you everyday and remind you of your daily obligations if you need to meet that five-year goal.
This is called the Khopdi to Chopdi effect — what happens when you transfer your dreams inside your head to the book.
PV subramanyam
writes at www.subramoney.com and has authored the best seller ‘Retire Rich - Invest Rs 40 a day’