Financial Goal setting – art and science

Ask anyone about his financial goals and you will probably encounter a blank face and hear the wheels cranking noisily in his head. Most people have never given financial goal-setting a thought.

Forget specifying actionable goals, they have not even seriously considered what things they desire. They may fantasize vaguely that a family vacation in Egypt `sometime soon` is a swell idea, but planning for it is left to a moment of inspiration. Very few people acknowledge a rather obvious truth that unless you begin planning sometime, the probability that your goal will never be attained is terribly high.

So how does one set goals? Here is the sample of what you will get if you make 3 people at random pen down their goal statements:

1.Provide my child with the best possible education
2.Own a fleet of my favourite cars
3.Visit Bahamas with my husband

These might sound like goals at first look, but actually, they are just dreams. The difference between dreams and goals, is that dreams are not SMART – Specific, Measurable, Actionable, Realistic, Timely. Let`s look at what each of these terms mean.

Specific: Specify the financial implication of your goal and the timeline by which you wish to achieve it. How will you calculate required savings every month if you do not know the amount you need to meet your target?
Ballpark figures just don`t work. This is because you will have to plan so finely, that if your initial figure is not correct, the closer you get to your goal, the more likely things may go wrong. Murphy `s Law! So you need to build you buffers and risk strategies too. And for this you need a precise figure.

Measurable: Devise a means of knowing how far you are in reaching your goal. This begins with spelling out the financial element. Now you can work backwards from the financial end, and create frequent intermediate goals. If you are going to need Rs 5 lakhs at the end of the next two years, check if your corpus is growing in that direction every month. A system which measures against a target every month will keep you from straying, much more effectively than a system that checks on you after a year has gone by.

Actionable: Attaining your goal has to be in your control – do not aim at something that requires alien intervention to happen.

Realistic: Your goal must be achievable, even by you. To be a millionaire by the age of 35 might be realistic for some, but in the majority of cases, it is a lot of hot air. Then again a bigger goal is sometimes easier to achieve than a smaller one. Why? The more attractive your goal, the more motivated you are to work at it.

Timely: Your goal must come with a sensible timeframe. Think about it before you put it down. Over optimistically short time-lines will only de-motivate and make you give up early.

So what would a great goal statement look like? Consider the following:

1. To buy a 2 bhk apartment worth Rs 15 lakh in KharGhar by 2010 with 50% of my own money and the rest financed with a home loan.

2. To take a guided tour of Europe in 2011, at the cost of Rs 6 lakh, financed with my own money.

Now these are good goals and you can work backwards from them in a precise manner. Once you have these down in front of you, the next important step is to rank your goals. Out of your wish list, you will have crucial goals, and you will have non-crucial goals.

Crucial goals are things you cannot compromise on – they are not optional. Which is why you might want to have your own corpus to fund them, as borrowed money may bring uncertainty. Non crucial goals can be downsized if they seem unattainable. You can also risk borrowing for them. In essence, non crucial goals are luxuries or wants, while crucial goals are necessities.
Rank necessities highest and rank luxuries lower. For example,

  1. Building a retirement corpus of 50 lakhs by 2015.
  2. Spend Rs 5 lakh on my daughter`s wedding in 2010.
  3. Buy a second house worth Rs 50 lakhs in 2011.

Remember, a resolution becomes most powerful when you articulate it, write it down, shout it out loud, stick it up all around your house and office. Let it scream out at you everyday and remind you of your daily obligations if you need to meet that five year goal. This is the Khopdi to Chopdi effect – What happens when you transfer your dreams from the inside your head, onto the pages of a book.

When you want a goal badly and let everyone know of it, it might seem like nature is conspiring to make it happen. Because all the people around you are so clear on what you want, they will start making minor accommodations so you can meet your goal.
A senior vice-president of major south-Indian conglomerate would let everyone in his office know, unobtrusively of course, that he would leave by six o clock everyday, at the latest. The entire workflow of in his office would align itself around that – not that they were hurrying things up, but when timelines could be crashed, they would crash them.

A crucial goal must be something you want badly and then you will notice that a distant, difficult to reach goal, becomes more and more attainable, not because it becomes smaller, but because you keep attuning and sharpening your capabilities to meet it. And remember, when setting goals, start with a smaller number. The idea is focus. The fewer the goals, the more your mind can fixate on it. And once a castle in the air becomes a brick and stone house on solid ground, you will be ready to tackle the next dream on your list.

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