Table of Contents
Chapter 1: How to Determine Your Financial Goals
Chapter 2: Setting Priorities to Reach Your Financial Goals
Chapter 3: Short Term Goals vs. Long Term Goals
Chapter 4: Focus on Feasible Financial Planning Goals
Chapter 5: Review Your Financial Goals Periodically
Chapter 6: Tracking Your Financial Planning Progress
The first step to take in developing your financial goals is to chart out what your primary priorities are. This is much more difficult than it appears at first glance. Before you start putting these priorities on paper, you need to analyze what you think is important in your life.
Different Perspectives
The most common priorities are a comfortable, financially independent retired life, medical coverage for old age problems, buying a home, providing for family etc. Different people may give different importance to each of these goals.
For example, an employee of a company that offers a pension plan will not be unduly concerned about financial independence post retirement.
He can afford to focus on his emergency medical fund so that old age illnesses and associated treatment costs do not eat into his post retirement income. Given that financial goals depend hugely on the individual and are highly subjective, it is critical for you to give enough thought to what is really important for you.
There may be some financial goals that matter a lot to you but others brush them off as inconsequential or unimportant. For instance, you want to acquire a beach villa by the time you are 40. Your colleague at work thinks this is an impractical goal because your beach villa is not likely to have easy access to the city and its many offerings.
He wants to set aside a fund for traveling to exotic locations post retirement. You believe that at that age, his health will no longer permit him to travel long distances and so his goal is irrational. The key is to understand these differences in perspective.
Evaluating Your Goals Based on Their Importance and Relevance
Your financial goals depend on what you consider important, tempered with rational thought and practicality. When evaluating what matters to you and what doesn’t, do so without being excessively influenced by what your neighbor or sibling or parent thinks.
After all, not just perspectives but every individual’s circumstances also differ and this impacts his/ her evaluation of financial goals too. For example, for the person with the pension, owning a home may be a priority but for someone who has ancestral property, it doesn’t figure on the list of priorities at all.
Other than these differences, it is also necessary to evaluate goals on the basis of their inherent importance and their relevance to your later life. For example, planning towards a medical fund is a more relevant and much more critical goal than planning for a post retirement vacation fund.
After all, the chances that you will need medical help in old age are very high. And there is no way to predict if your health will permit you to actually take the vacation you so painstakingly planned for. While they are both important goals, the medical fund is more of a necessity while the vacation is more of a ‘nice to have’ goal.
Classifying Goals
One good way to identify goals that are ‘must haves’ and those that are ‘nice to have’ is to make a list of all your goals and classify them. You can sort each goal into one of three categories – ‘Unavoidable’, ‘Important’ and ‘Desirable’.
Items like a fund for meeting post retirement living expenses come under the ‘Unavoidable’ category. A medical fund will come under the same heading. A vacation fund definitely comes under ‘Desirable’.
Once you have this sorted list, it becomes easy to see which goals need to be achieved first. You need to work constantly towards the goals under the ‘Unavoidable’ category and give first priority to these. Next comes the ‘Important’ category and last comes ‘Desirable’.
Family Involvement
A very important point is to involve your family in this goal setting process. While you should not be unduly influenced by opinions of friends or other relatives, the views and opinions of your immediate family should definitely shape your priorities.
Involving your family in the goal development process will inevitably give rise to some conflicts. When such conflicts arise, it becomes necessary to choose one goal over another. There are two basic rules to be followed when this needs to be done:
Rule 1: Needs of many come before the needs of one
Which of the goals benefits more people? Consider an example of when you are comparing the goal of buying a home with that of setting up a college fund for your son. If you are living in a rented apartment, which is inadequate for your family, the home gets more importance because your entire family will benefit from it.
Rule 2: The goal that gives higher benefit should be prioritized
What benefits will you or your family members derive from the goal? Let’s take the same two goals for comparison – buying a home vs. college education for your son. College education will enhance your son’s chances of landing a better job than he would get without it. A better job means better pay, better lifestyle and ultimately increased financial freedom for him. Is this more important than your new home?
If you already have a home but would like to move into a bigger or more conveniently located one, then education takes priority. But if you don’t, then the choice becomes really difficult. This is where the opinions of your family members should be taken into consideration in identifying the goal that is more important. Remember that both rules should be used in conjunction with each other to avoid skewing your perspective unfairly.
Next Chapter: Short Term Financial Goals vs. Long Term Financial Goals