Portfolio : A collection of investments owned by the same individual or organization.
Will : legal declaration of how a person wish his/her possession to be disposed after their death
Fund : An amount of money saved or collected for a particular purpose
Return : Profit or loss derived from an investment
Investor : An investor is any party that makes an investment.
Par Value or Face Value is the rate stated by the issuer. This is the value mentioned in the face of the certificate.
It is Total Assets of a person at the given point of time. That is buildings, investments and other assets s/he is having. Benefits will be enjoyed by his heirs after his death through his will.
A set of assets which an investor holds. This may contain equities, mutual funds, insurance and other cash equivalents.
It is the raise in the value of Consumer Price Index. That is the rate of increase of the price of a goods or services.
Do you think you know your financial goals?
Are you sure?
How are they different from your life goals? I mean, are they really different from one another?
You want to give your children a quality education, is it a life goal or a financial goal?
You want to learn how to play the guitar, is it a financial goal or personal goal?
Maybe even ask a friend, his answer may surprise you. It is because our definition of goal differs from person to person.
In fact, in this commercialized world, you cannot tell these goals apart. Even for some of the personal skill-specific goals like learning to swim has become a skill that can be learnt only through classes.
These goals vary in terms of financial requirements, time requirement and personal priorities. Too many factors like these may clog your brain and stop you from thinking clearly.
But in this article-cum-guide, we are going to
I’ll give you the tricks on how to review the strategy as a bonus at the end.
Without further ado, let’s get started!
I. Categorizing Your Financial Goals: The Next – Gen Approach
Categorizing your goals is often mind-numbing!
As I mentioned above, there are too many factors simultaneously influencing the achievability of your goals. And when there are too many factors, they will cause your financial plan to derail.
Although a professional financial planner’s advice would be helpful, a financial planner can only understand so much as you tell them.
But don’t worry; by the end of this section, you will have two things—a better understanding of your financial goals—and a list of prioritized goals in your hand—in 10 minutes or less.
Step 1: The SMART Spectrum of Financial Goals
Personal goals, professional goals, life goals and what not! You can find every other goal under the tree of financial goals. In this section, we’ll focus on understanding the nature of your goals.
With this approach, you will be able to see all your goals in financial perspective as achievable objectives rather than a distant dream.
What Is a Spectrum of Financial Goals?
Like the colours in a spectrum, each goal is similar to another goal but unique at the same time.
Some goals are pure financial goals, like distinct colours of a spectrum; whereas some are not completely financial goals but rely on your work and time, like the gradient between two distinct colours.
I am naming these ‘gradient’ goals as “hybrid goals” for convenience.
So What is SMART Spectrum of Financial Goals?
The word SMART stands for Specific Measurable Achievable Relevant and Timely.
The list of goals that satisfies these criteria is the SMART spectrum. And any goal which you can bring in this list is well within your potential to achieve them.
Let’s get SMART!
For example: If you want to buy a house, say:
Specific: Your goals, be it pure financial or hybrid goals, should be specific. Be specific about the financial need, time need and in other goal influencing factors like region, rules and regulations, economy status, etc.
Now, check whether the example quoted above is specific.
Measurable: One common thing about financial goals is that they need money and money is quantifiable. See the quoted example again.
What kind of flat? 3BHK.
What should be the worth? 2crores.
In how many years? 7 years.
Give your financial goals measurable numbers and values. Never use the word “around” or “at least”.
Achievable: Set Achievable financial goals. It is as simple as that. Since you are going to target sure-shot financial goals, you are not going to aim high and settle for less.
For a house worth of 2 crores in 7 years, you will need to save nothing less than ₹25 lakhs/year; assuming your savings will give a 12% return.
If this is possible for you, you are good to go. You have an achievable financial goal.
Relevant: One of the simplest yet vital steps. Make your financial goals relevant to your life and dreams.
If you are going to settle in Bangalore for the rest of your life, would a 3BHK in ECR, Chennai make any sense?
Define your financial goals from your dreams and then align your financial plans towards it, your financial goals will be automatically relevant.
Timely: Time, like money, is a core factor. You probably won’t need a house now, especially when you can rent a comfortable house for a cheaper price.
So you can take some time to achieve it since it is not going to affect the achievement of your other financial goals.
On the other hand, you cannot afford to lose time in your child’s education. You should plan for that financial goal before other financial goals.
Here is your free sample checklist for reference:
The checklist shown here is to demonstrate what we saw above with examples. You will find an updated checklist at the end of every step in this guide.
|S.No.||Spectrum of Financial Goals||SMART Financial Goal|
|1||Paying off debts||Pay off all debts (₹15 lakhs) in 6 years|
|2||Buying Own House||Save ₹2crore in 12 years, for a 3BHK home in ECR, Chennai.|
|3||1-year Emergency Fund||Save ₹6 lakhs for Emergency Fund in 3 years, to use in case if there is NO income for 1 year.|
|4||Upgrading Car||Exchange and replace the old car with a new one worth ₹15 lakhs in 5 years|
|5||Financial Independence||Attain financial independence in 18 years by investing with a holistic financial plan|
|6||Children’s Wedding||Save ₹8 lakhs for children’s wedding expenses in 4 years|
|7||Revamp House||Save ₹2 lakhs to revamp house in 3 years|
|8||Child’s Education Fund||Save ₹30 lakhs for child’s higher education in 15 years|
Checklist Update 1: List all your financial goals in terms of SMART Financial Goals as shown in the above checklist.
So, let’s take one step further to add financial goal time period to the formula.
Step 2: Terms of Financial Goals
As you already know, typically financial goals are classified based on the time period taken to achieve them. It, in fact, means time period taken to accumulate the funds required to achieve your financial goal.
This will be quick!
- i) Short Term Financial goals
ii) Medium Term Financial goals
iii) Long Term Financial goals
i. Short Term Financial Goals
These are the financial goals that take less than 5 years to achieve.
- Paying off your credit card bills.
- Generate passive income.
- Creating your emergency fund.
- Upgrading your car.
- Revamping your house, etc.
These are some of the short-term financial goals in terms of finances.
Great things start small. Setting short term financial goals is crucial in achieving your long term financial goals, as these prepare you for achieving them.
As you can see some of these short term financial goals are the base for your long term financial goals.
ii. Medium Term Financial Goals
The financial goals that require between 5-7 years to achieve come under the medium term category. Some of the examples of medium-term financial goals are,
- Paying off all your debts.
- Saving for your daughter’s wedding.
- Buying your own plot to build your custom dream house.
- Setting up your own business.
- Improving your credit score, etc.
Most of the medium term financial goals are standalone financial goals, which do not act as reinforcement to your other financial goals. However, some of these financial goals are also inevitable and must be achieved, one way or other.
iii. Long Term Financial Goals
Long term financial goals are your life goals. These financial goals take a time period of at least 7 or more years to achieve. Long term financial goals are not too many, but they are very important. Common examples of long term financial goals include,
- Attain financial independence.
- Retirement planning.
- Saving for your child/children’s education.
- An international trip with the family.
- Buying own house.
- Buying a second house.
- Early retirement planning.
Although, since we are listing the financial goals in terms of the time period, some short term financial goals could be a medium-term financial goal for others. Make adjustments as necessary to the position of your financial goals in your checklist.
Your free financial goals’ checklist is shown in the table below.
|S.No.||Spectrum of Financial Goals||Terms of Financial Goals: Years|
|1||Paying off debts||MediumTerm: 6 years|
|2||Buying Own House||Long Term: 12 years|
|3||1-year Emergency Fund||Short Term : 3 years|
|4||Upgrading Car||Medium Term: 5 years|
|5||Financial Independence||Long Term: 18 years|
|6||Children’s Wedding||Short Term: 4 years|
|7||Revamp House||Short Term : 3 years|
|8||Child’s Education Fund||Long Term: 15 years|
Checklist Update 2: Add terms of the financial goals to your checklist of all the SMART financial goals.
II. Prioritize Your Finanical GoalsTechnically, prioritizing your financial goals is the third step of categorizing your financial goals.
But the significance of prioritizing your financial goals in relation to listing them is very big. And it deserves its own segment for the depth we’re going to discover now.
Keep Your Most Important Financial Goals, First:
As cliché as it sounds, we should take the traditional “Needs before Wants” approach; we can add our smart twist to it later.
All the financial goals, be it of any category, are either your needs or wants.
Needs are your top priority!
Needs: These are the financial goals that are necessary to keep the balance of your life. These are inevitable responsibilities that cannot be avoided and should be your first priority.
For example Children education fund, emergency fund, buying Own house, becoming debt free, etc.
Wants: On the other hand, wants are the financial goals that you wish for. Though some wants can effectively improve the quality of life, the proper functioning of your life does not depend on them.
For example: Buying a luxury car, an extravagant wedding for children, a vacation house, etc.
In this manner, separate your needs from wants from the list of the spectrum of SMART financial goals. Here’s the list of the spectrum of SMART financial goals, with a distinct separation between your needs and your wants.
|S.No.||Spectrum of Financial Goals||Priority||Terms of Financial Goals in Years|
|1||1-year Emergency Fund||Need||Short Term||3 years|
|2||Revamp House||Want||3 years|
|3||Children’s Wedding||Need||4 years|
|4||Upgrading Car||Want||Medium Term||5 years|
|5||Paying off debts||Need||6 years|
|6||Buying Own House||Need||Long Term||12 years|
|7||Child’s Education Fund||Need||15 years|
|8||Financial Independence||Want||18 years|
Checklist Update 3: In your checklist, under each term of financial goals, mention priority. Name it whether it’s a ‘Need’ or a ‘Want’.
Since needs are the top priority, they are placed above the wants.
But, are all needs equally important? If they are, which one will you focus on first?
Read the next-gen twist to it below!
The Weighted Priority of Financial Goals:
The weighted priority technique is so simple, yet so effective one.
Assign numbers to your financial goals on a scale of 1-10. On which 10 means the highest priority and 1 lowest priority.
And unlike gravity, the financial goal with the highest weight stays on top and the lesser weight below it and so on.
When assigning priority, I recommend you to write down the financial goals list as grouped in the checklist we have seen in the previous section.
|S.No.||Spectrum of Financial Goals||Priority: Weight||in Years|
|Short Term Financial Goals|
|1||1-year Emergency Fund||Need||8||3 years|
|2||Children’s Wedding||6||4 years|
|3||Revamp House||Want||5||3 Years|
|Medium Term Financial Goals|
|4||Paying off debts||Need||9||6 years|
|5||Upgrading Car||Want||4||5 years|
|Long Term Financial Goals|
|6||Child’s Education Fund||Need||10||15 years|
|7||Buying Own House||8||12 years|
|8||Financial Independence||Want||5||18 years|
Checklist Update 4: After separating as ‘Needs’ and ‘Wants’, add priority weight (on a scale of 1-10) to each financial goal in the checklist as shown above.
See the checklist above updated with weighted priority for the list of financial goals we’ve been seeing.
When you assign priority to your financial goals, also write down the purpose of your financial goal.
Ask yourself why you need/want it. And then write down your reason next to the financial goal. This will help your weight to be more accurate as per your need.
It will also be an added advantage if you could write down the consequences of not attaining that financial goal.
Once you assign a weight to all the financial goals under needs and wants in all the three categories of financial goals, rearrange them.
The rearrangement should be in the order of highest priority first descending down to lowest priority at the last. Follow this arrangement of financial goals in all the categories. Note: You should also note that you should not mix your financial goals under needs and wants while rearranging. Always keep the needs separate and above the wants.
See the checklist below to see the final form of our checklist, with spaces for the purpose of the financial goal.
|S.No.||Spectrum of Financial Goals||Priority: Weight||in Years||Purpose of Financial goal|
|Short Term Financial Goals|
|1||1-year Emergency Fund||Need||8||3 years||
|2||Children’s Wedding||6||4 years||
|3||Revamp House||Want||5||3 Years||
|Medium Term Financial Goals|
|4||Paying off debts||Need||9||6 years||
|5||Upgrading Car||Want||4||5 years||
|Long Term Financial Goals|
|6||Child’s Education Fund||Need||10||15 years||
|7||Buying Own House||8||12 years||
|8||Financial Independence||Want||5||18 years||
Checklist Update 5: While adding priority weight, write down the purpose of each SMART financial goal and their importance. It allows you to give more accurate priority value.
However, I recommend writing down the purpose of your financial goal before adding the priority weight to the checklist.
How long did it take? 10 minutes? Less?
Your financial goals are categorized, prioritized and you even know the honest answers to why you want to achieve them—read the purpose column of your checklist.
So what are you waiting for, let’s develop a strategy to achieve them too!
III. Strategic Preparation For Financial GoalsHaving a list of the financial goal is never enough. You need a strategy to achieve them.
More than a strategy, you need a working strategy to reach your financial goals.
Though there are several ‘pre-made’ strategies, their success rate is only below par. For this major reason, you need a customised strategy.
You are not an average individual to implement a strategy based on averages. You are a unique individual with unique financial goals. And you need a strategy that is as unique as your financial goals.
So why not prepare one for yourself?
Follow these steps, just dive in and you’ll have a working strategy to achieve your financial goals when you come out.
Step 1: Assess Today’s Cost of Your Financial Goals
Have you ever asked your friend or a colleague how much he spends on his child’s education?
They spend. They spend a lot. But how much do they spend?
|Particulars to Enquire||Enter The Answers in ₹|
|What stream is his child studying?||
|Which year is he studying in?||
|What was the admission expense?||
|Did the expense increase every year?||
|Is there any scholarship available?||
I bet none of us asks such specific questions. At least questions that are this specific.
Start asking specific questions. Start collecting legitimate data; it is as important to your financial goal as your financial goal does to you.
Do it for all the financial goals you have listed as per priority. Calculate the sum of all the cost for each financial goal group viz. Short term, Medium term and Long term. This sum is your requirement to achieve all your financial goals in today’s term.
Trust me, when you see this definite number you will focus more on achieving your financial goals effortlessly.
However, considering the inflation element, a new corpus figure should be calculated from this existing figure.
Step 2: Adjust Financial Goal Specific Inflation
Find financial goal specific inflation for your financial goals.
Fact: Inflation will have a different effect on a different set of product and service.
Almost all people fail to identify this simple fact and goes ahead with the average inflation rate they find on the internet. There are number of industries with their own inflation rates that contribute to the average inflation rate which we see on TV or the news.
It is not possible for you to have financial goals under all of these industries. So if you take the average inflation rate, it is an error.
Failing to do this is one of the most common causes coming up with a wrong corpus figure.
For example: If you are buying a car worth of ₹15 lakh (today) in 5 years, you cannot assume the average inflation here.
In 5 years the average inflation could be 4% and the inflation of the automobile industry could be 6%.
So the figure will be like,
|Car price||₹15 lakhs (Today)|
|Car price @ 4% average inflation||₹15.60 lakhs (in 5 years)|
|Car price @ 6% specific inflation||₹15.90 lakhs (in 5 years)|
Note: inflation rates mentioned here are only assumptions and not true values.
If you think the difference is small, consider the accumulation of such errors in all of your financial goals.
As said above, find financial goal specific inflation and adjust the cost of your financial goals as per their inflation rate. Do it for the number of years required to achieve each financial goal.
Once you do it, find the sum of all your inflation-adjusted financial goal costs. To the resulting sum add a 10% buffer to the sum as uncertainty buffer. This figure will be your actual corpus requirement for all your financial goals in life.
With the precise corpus figure in hand, you can take a step forward in your progress. Scroll down.
Step 3: Asset Allocation for your Financial Goals
Two things, you should consider completing this step of asset allocation. One is your risk tolerance assessment followed by the asset allocation plan.
i) Assess Risk Tolerance:
Every person has different levels of risk tolerance. Since risk tolerance directly influences decision making, you must take risk tolerance into consideration.
Before making the asset allocation you must be aware of your risk appetite and tolerance. Your asset allocation plan will depend only on your sensitivity to risks.
ii) Make a Mixed Asset Allocation Plan:
Asset allocation is usually chosen between debt asset and equity asset among several other forms of assets for investment.
Debt investment instruments are safer and secure than equity instruments. The returns on these instruments are a solid 8-9%. Despite the fact that the returns at these rates are excellent for short term financial goals; they are not impressive in the long term.
Equity instruments, on the other hand, yield higher returns in the long term. Even though equity funds are considered risky than the debt funds, they are the best investment instruments for long term financial goals.
So what to choose?
Depending on your risk tolerance, the ratio of debt and equity is calculated to make the investment.
Typically for a financial goal oriented person with good risk tolerance, the asset allocation ratio will be around 50-60% in equity funds and the remaining in debt funds including real estate.
If you are risk-averse, you should allocate more towards debt investment instruments and lesser on the equity instruments. But since you are investing for long term financial goals as well, you can take advantage of your benefit.
However, it is always wise to invest in diverse investment instruments.
Step 4: Expect a Return % from Asset Class
Each asset class offers a different rate of returns. We decided the asset class ratio in the previous step.
Now, have a return expectation on each of the asset class with the available data for the period of time you have chosen.
Having such expectations is crucial in projecting the progress of your strategy to achieve your financial goals.
Meanwhile, if any of the asset class underperforms, you can fine-tune your investment strategy to meet the lag.
Hence, it should help you to have a calculated precise expectation of each asset class. And with this return expectation, you can calculate the return on your portfolio.
With these 4 steps—Starting from assessing today’s cost of financial goals to “Expecting a return”—your strategy is ready.
It is time now you give life to your financial plan now.
IV. Implement The Strategy For Your Financial GoalsIt is clear. You are going to invest in equity funds as allocated above.
SIP is your best instrument or for any salaried employee.
2 things–decide and follow them in this phase of your financial plan to achieve your financial goals.
i) How much to invest?
ii) What to choose?
1. How Much Should You Invest?
You have your financial goals in place and the strategy to achieve them in place. It is time for the BIG question.
“How much should I invest in SIP?”
The answer to this question varies, obviously, to each and every person. But it always depends on two factors.
- Your Income/Savings
- Your Financial Goals
But, what if I tell you, you already have the answer?
Remember when you set a return expectation on your portfolio?
Yes, your expectation is your key to decide on how much to SIP.
However, these two factors seen-above are necessary for increasing your SIP rate. They are like the two sides of a balancing scale.
You can increase your investment by increasing your income—in case if income is not sufficient—on one side. On the other side, you can make adjustments, without giving up the financial goal, to certain aspects of your financial goal.
For example: If you have a financial goal of family vacation trip twice a year, you can make it once a year trip. In this way, the contribution to investments can be increased.
And when you see the performance of your investments better than your expectation, you can go back to your original financial goal.
2. Multiple SIP and Common SIP, What to Choose?
As we have seen before, for long-term financial goals SIP in equity mutual funds is the way to go.
It is in the sweet spot of investments since it yields higher returns with options to balance and neutralise the risks.
However, a question arises whether to opt for separate SIP for each long-term financial goal or a common pool SIP for all your long-term financial goals.
Here’s a simple question to give you the right answer.
A separate internet connection for all your devices like Smartphones, computer, laptops, smart TVs and Gaming console—or—common Hi-speed internet connection shared by all the devices over Wi-Fi?
Which one is easy and effective?
You get the point, right?
Centralize your investment.
For example: In the case of multiple SIPs, if any one of the priority SIPs lags in performance as projected, the first thing that comes to mind is to compensate it with the returns from performing SIP.
How long do you think you can compensate between SIPs?
Common SIPs yield the same returns as the multiple SIPs do, then why go for the stressful option?
The reason: One major reason for people to choose the multiple SIP investment option is; it allows them to invest according to the financial goal specific inflation rate.
Separate SIPs for separate financial goals, for separate inflation rates. Isn’t it too much to handle?
Remember the ‘financial goal specific inflation rate’ in “Step 2” under Chapter III “Strategic Preparation”?
Common SIP is not so common but is always the wise option to choose.
Once you decide on this, we have just one more thing left.
Review Of Your InvestmentsReview is a lifelong process. A periodic review of your investments is as important as making a strategy.
Mandatory: Review your investments on a biyearly basis, i.e. twice—every 6 months— in a financial year.
Apart from the mandatory two reviews every financial year, a review is necessary for any change in the status quo of your personal finance.
Your financial goals may change. You may want to retire early. Your spouse may have started earning. You may have started a new business and it is doing well. Any such significant change to your personal finance status should be reviewed for its impact on your financial plan.
For example: Your current car is in excellent condition than expected, hence the financial goal of buying a new car can be postponed.
Your Son/Daughter may feel emotionally ready and think it is the right time to start a new life. So, you’ll need to advance the wedding savings financial goals.
You can identify changes such as these and can make an effective course correction in advance with periodic reviews.
To simply put, regular review of your financial plan makes the financial goals achievable.
Important: Achievement of your financial goal is not in the magnitude of your investments but in the consistency of your investments and reviews.
Your dreams are only dreams until you write them down. Then they are financial goals.
Spend 10 minutes—prepare a SMART checklist—they transform into objectives. Prepare the strategy, they transform into achievable objectives. Implement it, you are in the game.
Reckless investors perish. But the one with a solid financial plan wins every single time. You can indulge in your thoughts forever on how to make a financial plan—or roll up your sleeves and make one.
If you are in need of professional help, you can always reach out us for A free discussion. Get your appointment and try our 30-minute complimentary Financial Plan Consultation HERE.
I hope this guide helped you to develop a financial plan to achieve your SMART financial goals. Share this guide to help your social circle too.