Financial Goals are set first and then a road map is created to achieve them. But again the basic question – how do I set my financial goals?
Any goal, financial or otherwise will become a Smart Goal when you add following features:
Being “Rich” is a goal but not a smart goal. If I put it like this that I wish to plan for my retirement, so that I am financially independent – it becomes more specific. The statement specifies “richness” and the time by when you want to achieve the goal. But again this is not a smart goal. Something is missing. Let’s see what more it needs to become a smart goal.
Besides being specific one should also be able to assign a number to the goal. Instead of saying “financially independent” it should define the money in number terms. This is not simple as it looks. When you wish to assign a cost to future expense, you need to guess or calculate the numbers taking a few realistic assumptions like inflation and interest rates. These assumptions can also vary. For example the inflation rate on Education can be much higher in comparison of buying car. So it is an expert’s job. But when you assign numbers a goal becomes measurable and comparable also. So for the above example if I say (in present value) – I wish to buy a new car of Rs 10 Lakh and a house worth RS 60 Lakhs in Goa.
Only decorating the goal with number is not a smart work. A goal needs to be thoughtful and has to be seen in the light of practicality as well. We have to see if this is attainable or not. It should not be an out of reach dream that one starts to work upon and expect magic to help. Again an expert advice is required here and he can help you to understand its reality. Also sometimes a non-achievable may be adjusted and can be made achievable. So we need to sit and give a deep thinking and even ask for expert help. Again for the above example – can a person earning Rs 30000/- per month having two children to support and monthly expense of Rs 20000/- achieve the above mentioned goals? What if he has not started saving till today? Or what if he is bound to get some inherited money? So under all these circumstances, which are unique for an individual, we need to check the attainability criteria of a goal to make it a smart goal, and ensure it is realistic.
Goals should be realistic – you can’t say I will build my retirement goals by investing in last 5 years of my job or I will invest Rs 500 per month to achieve my retirement corpus of 3 crores.
This is last step of setting smart financial goals but very important. There should be some time limit attached to every goal. For ex I want to buy a car in 5 years or I want to buy a house in 2030.
Life is a not like a play script. It does not dwell on one theme or issue. It is full of phases, events and happenings. In financial life one has to invest today for things he would require in a very short span like annual premiums or kids hostel fees and for the expense that would be have long span like kid's marriage or retirement. Thus, goals need to be put or priority list. Once these are recorded on a time frame they can be classified as immediate goals, mid-term goals and long term goals.