Need help in deciding your financial goals for the New Year? Here’s a five-step approach that should help you get started.
Enough has been said about the importance of financial goals and how they will help you meet your financial needs at all stages of all life. But how do you really decide what financial goal is suitable for you? For some, saving up for a house or a car may be a goal. And then for some, building up a corpus that is enough to start their own business may be a life goal. If you’re at sea about how you can convert a life or lifestyle goal into a financial goal, here’s a five-step approach that should help you list them down:
#1. Is Your Goal Linked To Money?
You may have a whole list of life goals but check if they are linked to money. For instance, if you want to start your own business before you hit 40, it’s certainly a life choice, but it’s also a decision that you will need considerable financial support for. You won’t just need capital to start the business but also funds for those months when income will be low or practically negligible. This kind of goal needs money for sure.
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#2. How Much Money Does Your Goal Need?
Figuring out how much money you would need for a goal isn’t as straightforward as it seems. For instance, finding out how much money you would need for a car or a house isn’t that difficult. It’s a cost that you can work out quickly by taking the help of any of those financial calculators abound on the internet.
However, some goals like funds for your retirement or finding out how much money you would need for your child’s marriage or education isn’t as straightforward. For working out the funds that you would need to set aside for these goals, you would need to factor in things like inflation, your rising expenses – lifestyle, different rates of returns on investments as well as your ability to save.
You can take the help of a financial adviser to help you plan for these financial goals and figure out the funds that you would need for them.
Bifurcate your small and big financial goals in terms of the amount of money that they would require. If you can save for the sum required in less than 4-5 years, then it is a relatively “small” financial goal. If you need to save up for more number of years, the goal can be well classified as a “big” goal.
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#3. When Do You Need The Money?
Once you’ve listed down the financial goals that you’ll need to work towards, the next step is to find out when you would be needing money for these goals. If it’s a large sum that you’re going to need, you will need considerable time to save up for it. Smaller amounts like that for a home renovation or car won’t take as much time. Considerable sums that you will need years later will require you to invest in instruments that beat inflation.
#4. Can You Save Or Afford To Save Up For It?
Saving up for some financial goals is non-negotiable. For instance, saving up for your retirement or your child’s education is a goal you shouldn’t compromise on. Neither will you be able to work until your last breath nor would you find it respectable to borrow from a family member for your child’s education. Review your financial goals to check what goals you can afford or can’t. To meet one goal, you shouldn’t have to sacrifice funds for a non-negotiable goal like funds for your retirement.
If a financial goal is linked to your life values and aspirations, you should prioritise that goal over any other. It is perfectly understandable if you can’t meet all your financial goals as your savings are going to be limited along the way.
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#5. Create A Budget And Make Investments:
Create a realistic budget that will help you inch closer to your goals. Ensure that you have a strong handle on what’s coming in and what’s going out and plug any leaks that unexpected expenses may create in your budget. Once you know how much funds you would need to save for a certain financial goal, check if investing can help you achieve that goal faster. Investing in a combination of risk-prone and traditional forms of investment like equity Mutual Funds and Fixed Deposits respectively is a good way to go about working towards achieving your goals. Equity, as an asset class is popular for giving inflation-beating returns averaging between 10%-13% p.a. Over a period of 20 years, you might be able to save about Rs. 1 Crore.
Once you’re on this path, monitor your progress and budget regularly. Redirect whatever savings you make every month into a high-interest generating Savings Account to ensure your savings are multiplying.
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