Where will you be FINANCIALLY five years from today?
The financial secret of moving from where you are and where you want to be?
Would you like to know the financial secret behind moving from where you are and where you want to be? Try to answer this question. “Where will you be financially five years from now? 10 years from now…? 20 years from now…?”
You may get answers like “I will be financially stronger”, “I want to be financially better”. Are these answers specific? If you don’t know where you want to go exactly, there is no focus. When there is no focus; there will be lot of distraction. Distraction either leads to mediocrity or destruction.
How to refrain yourself heading towards mediocrity or destruction? You need to set Specific, Measurable, Achievable, Realistic and Time bound Financial Goals. That is S.M.A.R.T. Financial goals.
Let me take you through step by step to set SMART Financial goals.
1) List down Financial Goals:
Write down all your financial goals like buying a house, kid’s education, Vacation, Retirement and so on. You may wonder why this mechanical act of writing financial goals is so important. You can be thinking something without actually realizing what that something is. It is intangible and so it is not clearly defined in your mind.
When you start putting that thought into words and you try expressing it, an amazing thing begins to happen. By creating it in words, that abstract thought now takes on body, shape, form, substance. It is no longer just a thought. It becomes something which motivates you, or creates a gut feeling inside.
Your dream becomes a goal the moment you write it down. Say one of your dreams is to buy a house. You dream about it a lot. But the moment you started writing it down, your mind will ask yourself “when, where, how many square feet, how many bedrooms?” This writing gives clarity to your goal and it forces your mind to find out the ways and means to achieve the goal.
2) Categorize and Prioritize:
You need to categorise your financial goals based on the timeframe. Generally the financial goals less than 3 years are short term financial goals. The goals to be achieved in the next 4 to 7 years are medium term goals and the financial goals to be achieved after 7 years are long term goals. This categorization will help you in building a roadmap to achieve your goals and also in selecting the right investment products.
Your daughter’s wedding would be more important to you than the international vacation. Buying a house is more important than buying a farm house. This prioritization will help you in creating a better financial plan. Suppose if you are in deficit, you know which financial goal need to be compromised and which are all the financial goals you want o achieve irrespective of the deficit.
3) Fixing a target date:
Fixing a target date for your financial goals may look like a dump idea. How do I know in advance the date of buying my house, the date of my daughter’s wedding? But if you are not fixing it, then you will not be financially prepared for that. If you are financially prepared and the goal event is not taking place at that time and getting postponed for some reasons, you will not have any financial worries. You will be financially ready from thereafter with on enough money to meet that goal.
Fixing a target date will psychologically influence your thought process to work on that goal. Also the moment you fix the target date your mind starts running a countdown. Only when you know that after how many years from now you want to achieve the goal, you will be able to make a financial plan.
4) Estimating the cost:
First you need to estimate the cost as of today. If you are planning to save for your daughter’s wedding which is expected to take place after 10 years, first you need to calculate the cost of the wedding in today’s prices. Then you need to adjust it for inflation of 10 years. Now you will have the future value of your target.
5) How much to save?
Once you have found out the future value of the goal, you can easily decide on how much you need to invest in order to reach the targeted future value. Initially you may only be able to contribute less. But year after year you can increase this contribution based on your increment/promotion/income growth.
So you need to take into account the expected growth rate on your salary or business/professional income in calculating how much to save towards each and every financial goal.
6) Budget the savings:
As you know by now exactly how much to save towards each and every goal, you need to accommodate these savings in your budget. If you do this year after year, then you can see all your financial goals becoming reality.
The difference between a goal and a dream is the written word. I am confident that you will come to find that financial goal setting works and that it will soon become a way of life for you.
Start setting your financial goals today.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at firstname.lastname@example.org.