Financial or monetary goals are established by individuals and corporates alike. Individuals have monetary goals which have to be met at different stages in life while financial goals enable corporates to keep a track of their income and expenditure to ensure that they don’t overshoot their budget.
In this article we focus on the personal financial goals, the most common future goals set by individuals and some of the strategies or financial plans that can be used to implement them.
Financial goals are generally split into short, medium and long term in addition to an emergency fund to meet critical financial requirements. For simplicity, let’s consider short-term goals as those that need to be met in the next couple of years, such as purchasing a new car, going on a vacation and so on; medium- term goals are planned with a 5-7 year horizon and usually comprise of investing in property, meeting higher education costs of kids etc. and anything beyond that is considered to be a long- term financial goal such as saving for the wedding expenses of children and life after retirement etc.
Irrespective of the life stage of an individual, realistic financial goals can be achieved by meticulous financial planning and sound investment practices.
Individuals differ immensely in the way they plan to save for their financial goals. While some of them may be extremely risk averse, there are others who are highly aggressive when it comes to risk taking.
The second feature that comes into play is the age of the person. Typically, even the most risk averse individuals in their early stages of occupation would not mind taking a moderate amount of risk compared to someone approaching retirement.
Finally, the purpose of a financial goal will determine investment parameters. A retired person with no financial commitment but has some money set aside to take care of general expenses and medical bills post retirement will invest in schemes that fetch assured monthly remuneration rather than invest in risky equities or gold.
Commonly, savings and investments are carried out in the form of bank deposits, secure financial instruments like government debt and risky instruments such as equities, commodities and corporate debentures.
For risk averse individuals, investing in secure government debt could be a priority irrespective of the time horizon of the financial goal. However, returns generated by these instruments barely beat rising inflation and therefore individuals investing in them should either do so with a large capital or start at an early age.
Furthermore, investing in debt generally does not lead to capital growth unless interest is compounded, clubbed with the principal and re-invested. In an era of falling interest rates, the interest received will have to be reinvested at lower rates compared to the original investment, thereby, reducing the overall return on investment (ROI).
Conversely, these zero risk financial instruments are the most preferred option to meet short- term financial goals even for investors willing to take risks, since investing in high- risk equities could lead to capital erosion in the short- term.
Financial planning for medium term goals usually comprise of a mix of risk- based assets and secure investments. While risk assets lead to capital growth over a period of time, the secure assets ensure regular income. A balanced mutual fund usually serves the purpose.
Long- term goals can be achieved with a large part of the investment being placed in funds that invest in equities and high- rated corporate debt with a small portion in secure investments. In addition to growth funds, there are others like the National Pension system (NPS) that cater to the long- term financial goals of retail investors.
Regardless of personal monetary goals, judicious financial planning plays a crucial role in meeting these goals. Monetary goals can be achieved by ensuring that planned savings and investments towards these goals are not deviated to any other source. Debt that is generally accumulated along the way can be gradually retired, starting with the loans carrying high interest like credit cards and narrowing down to the ones such as a home loan. Financial planning should comprise of all sources of income minus debt andexpenses to arrive at the estimated savings figure.
As income rises, so should the savings towards achieving the goals. Financial plans need to be revisited every once in a while to review the progress and carry out changes in the investment structure if required.
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