Financial Goals

Your CA Guide📚📖

5 min readJun 21, 2022

What are Financial Goals?

The word ‘goal’ brings to our mind the visual of a goal post and a football screeching past the goal line into the net. Just like 11 players on a football team work together to score a goal, our financial goals require coordination. A financial goal is monetary objective of an individual. It is a purpose. A financial goal is determined by the future requirement for money.
Retirement can be a financial goal. Saving for child’s marriage 10 years later could be a financial goal. Saving for making the down payment of your home loan will qualify to be a financial goal. Saving money for a foreign trip 7 months later can also be a financial goal. Financial goals always exist. Only the smart individuals recognize the goals. Recognition is half the job done. Once you know your financial goals, you need to work towards them. A lot of people don’t acknowledge the importance of managing financial goals. Naturally, they do not even plan for their financial goals.
Regardless of your age, setting financial goals is a very important task. The secret ingredient to set up personal financial goals is anticipating your needs. For instance, if your monthly expenses would be ₹ 40,000 once you turn 60 years, you will need to have ₹ 50,000 income source at that time.
Recognizing your aspirations and future needs are 50% job. The next 50% is setting up a plan to attain the goals. Time is freely available. But time is hard to find when you need it. All our financial goals require some time to fructify. This is why it is important to categorize our financial goals based on the available time or the time required. We can categorize goals into 3 main types: short term goals, medium term goals and long term goals.

Short Term Goals

Short term goals are tasks that can be accomplished in up to 1 year time. As you can understand, short term goals are something that you aim for in the near future. For instance, saving and paying off credit card loan is a short term goal. Similarly, purchase of household furniture, or minor home improvements can be examples. Saving for a car/two-wheeler down payment is also a common one. Short-term financial goals can also be in form of saving for vacation, gadgets etc. Short term goals are the easiest and quickest to attain.

Medium Term Goals

Medium term financial goals will be outcomes that can be attained by giving more than 1 year to about 5 years. As you can see, medium term goals take longer time than short-term financial goals. Before setting medium term goals, find out your dreams and desires in the next few years.
These are likely to be the biggest factors that will guide your saving and investing agenda. We must remember that medium-term goals can be quite hard to achieve. This is because they fall between short and long term goals. Short term goals get a lot of attention since they always seem so near. Long term goals also get a fair bit of attention because long term goals like financial security during retirement or child’s higher education money are extremely important. This virtually leaves us with a small amount of time and focus for medium term goals.
A good way to constantly track and monitor medium term financial goals is to write the goals down. Review the progress after every 3 months. This will ensure adequate attention is given. In case you fall behind, you will have time to get back on track too.
Medium term goals give you some time so it is important not to become totally risk-averse in terms of investment. While short term goals have less than a year to be accomplished, medium term goals allow you to strike a balance between risk and reward.

Long Term Goals

Long term financial goals are those which will take more than 5 years to achieve. They are important for you and possibly for the family. The time frame is longer in case of long term goals because of a combination or individually two factors:

1. The financial requirement will emerge after a long time. For instance, your retirement will happen only after 60 years of age. You cannot prepone it to 35 years of age.

2. The financial requirement is big so you need to save and invest for a longer period of time. For instance, if you expect to send your child for higher education at a cost of ₹ 60 lakh and can invest ₹ 10,000 only per month, you will need 18 years to accomplish this if the investment gives you 10% return annually. Planning for the long-term to hit your major financial goals will make the planning and execution systematic and organized. These goals cannot be compromised at all. Once the time is gone, you will not have it back. Long term financial goals, unlike the other two (short term and medium term), give you the luxury of time. But, therein also lies the risk. Too much time can compel you to keep delaying the inevitable when it comes to taking actions to support the goal.

Hence, it is extremely important to be on the right track at all times. Your retirement planning or child’s higher education cannot wait for another 5 years when their time will come. Can you imagine working at 65 for another 5 years just because you have not saved enough.

What is Risk Tolerance?

Any investment has two friends — Mr. Risk and Mr. Return. If you become more friends with Mr. Risk, your investment can get more of Mr. Return. However, more risk can also mean getting negative return also, if the time-frame is too short. This is why every investor, irrespective of their maturity, knowledge and experience level, needs to know how much risk they are comfortable with.
What does taking risk mean? Financial pundits will tell you that risk tolerance is the degree of variability/swings in investment returns that an investor is willing to withstand. Simplifying it, this means if you wanted 10% return and got 5% return — how comfortable would you be with it?
Let’s look at another instance. You set out with an assumption of 20% annual return, but you get 4% negative return. Will you be comfortable?

It is critical that you have a realistic understanding of your ability and willingness to bear risk. The ability to tolerate large swings in the value of your investments will tell you how comfortable you really are. It is important to be frank and honest with your fears and worries. You may tell people that you are very risk-taking, but a small swing in investment return may surprise you negatively. If this trend keeps on happening, it is important that you accept that your perception about yourself is not correct.
As a thumb-rule, higher returns come when you take higher risk. If you take smaller risks, returns should not fluctuate much. If you take on too much risk, you might panic and sell at the wrong time. This may defeat the entire purpose of your investments. If you take on too less risk, you may never reach your desired financial goal in time. This will, also, defeat the entire purpose of your investments.

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Originally published at https://www.yourcaguide.com on June 21, 2022.