Take a minute and think of all the things that you would do if money was not a constraint. Maybe buy that dream home, take an exotic family vacation, purchase the swanky car that you have always fancied, or send your children for education to the best of institutes abroad. If you harbor any such ambitions, be assured that you are already on the path to fulfill your dreams. Setting a goal is the first step to achieve success in any endeavour, be it personal, professional or financial.
Well put by no other than the great scientist, Albert Einstein: “If you want to live a happy life, tie it to a goal, not to people or things.”
Tying your financial activities to clear-cut goals is a sure shot path towards financial prosperity. Setting goals are important as it gives us a sense of purpose and direction, making it possible to effectively utilise the resources at our disposal. It also helps us avoid all the traps that may derail us from our journey to build financial well-being.
To set the right foot on the path to financial planning, you must consider the following factors while defining your goals:
lBreak down your goals
Divide your life-goals into short-term (vacation, further education), medium-term (marriage, home) and long-term (retirement). This helps in selecting the right instruments to achieve goals within the set time frame.
Options such as liquid/debt instruments and fixed deposits can be considered to build a corpus of funds for short-term needs. Equity has historically offered around 15-16% CAGR over 15-20 year time period and is the best investment tool for medium to long-term goals. You can also explore the SIP route for investing in mutual funds and equities. Regular investments via SIP will not only bring the much needed discipline in your approach but will also make the magic of compounding work for you.
lMake the goals measurable
Decide the amount you would need to fulfill each goal. By using any of the free online calculators, you can arrive at the figure that you must save every month to achieve these goals in a time-bound manner. Goals also serve as a reference check of your financial habits. Healthy money management skills will take you closer to your targets. In case you find yourself lagging behind your targets, consider it as a signal to check your attitude towards savings and investments.
lNever lose sight of your goals
The desire to make quick returns has been a key reason for financial setbacks. When the markets are doing well, investors jump in to have a share of the pie, even when they are not well aware of the intricacies involved in stock trading. The experience of friends or colleagues who made some profits through stock trade also serves as an enticement to make the most of the market trends, leading to imprudent financial decisions. Similarly, attractive schemes to ‘double the money in a limited time period’ or ‘get 40% returns on investments’ lures investors seeking to reach their financial goals faster. Every investor should be wary of this tendency. Always keep your goals at the core, devise a plan that will help you fulfill them.
lDon’t procrastinate
Without goals, there can be no financial plan in place. The sooner you fix your tar
gets, more time you have on hand to make the benefit of compounding work for you. To elucidate the point, take the example of two friends, Ajay and Vijay. Realising that their retirement is 20 years away, they both decide to start investing. As they are aware that fixed asset investments are not sufficient for wealth creation, they decide to invest in equity schemes that generate a return of 12%. However, Ajay, cognizant of the concept of compounding, starts his SIPs immediately while Vijay waits for two years to take the plunge. Look at the amount they accumulate for their retirement with a monthly SIP of Rs 1,500. (in the table).
The above example clearly highlights the benefit of starting the investment process earlier. Kick starting this process, however, requires clear identification of the goals to design a concrete financial plan. Any delay in the goal-setting process would require you to either save more as you tend to lose on the returns that compounding could accrue for you or set a longer time horizon to reach the target.
Henry Ford rightly said, “Obstacles are those frightful things you see when you take your eyes off your goal.” It is only by keeping your eye on the prize that you can avoid all the diversions and work single-mindedly to make all your financial dreams come true.
(The writer is MD and CEO at Axis Securities)