Why are financial goals necessary ?

First of all what do I mean by a financial goal - It is the purpose for which one needs money in the future.

There are predictable future needs and wants that you would like to meet for which money is the most important ingredient. Usually this is very fuzzy and most of us simply start putting money in FD or RD without really thinking about whether that is the right way and instrument to meet the goal. Once you are really clear about the goal - that is, you clearly know what the goal is, how fast you need to reach it, what is the quickest way to reach it - you can bring a lot of refinement to your investment strategy. Setting clear cut goals to be met is the HARDEST part of financial planning but it is fun once you get started.

Scenario 1

Let us suppose you do not have goals and start putting money in equity MF just like that because you heard or read about investing. It is good that you started without getting stuck in an analysis paralysis mode that, "I will put my money only after learning all things about MF". This will never happen. Cut to 7 years from now: you have About 15 lakhs money in MF due to gains etc. At that time your mind and situations will dictate / coax / cajole / rationalize / force you to take that money out and use it for a purpose which seems necessary at that point in time.

However, if immediately after starting to invest you start a 'process of clarifying your goals' like: to retire at 60,  I will need x amount to support myself and my spouse for the rest of our lifetime or for my child's education I will need Y amount in 15 years, it will naturally lead you to many questions.

Some other goals may be:

• Business expansion
• Travel
• Children's expenses ( Education, Marriage)
• Car purchase
• Real estate purchase

Let us take the first example - How much money do I need to have when I retire to sustain the rest of my life. The questions that may jump out at you may be-

• How much time do I need to plan for
•  What will be my monthly expenses be starting at 60? 
• How will my lifestyle will be?

Caution - Don't get into whether you will live till 60 or prefer not to live beyond 70. Look around you to see the life expectancy of your relatives and friends and make a cautious choice. I too do not know if I will die tomorrow or tonight or in next 1 hour. Just plan.

Some answers to these questions can be extrapolated from your current monthly expenses - what expenses will still be relevant to you after retirement considering an inflation rate of 9% p.a in India. So a clear understanding of your current expense pattern is also important for this exercise. We all want the quality of life to stay the same or improve, not to get worse. So saying that you can minimize your expenses to simply one meal of Dal Chawal will not cut it. 

Already you can see that you and your spouse will have to spend a lot of time to clarify such a goal. It is not easy but it is essential to make sure that your money is working for you in the best way.

Scenario 2

Let us assume that you have completed the entire exercise diligently now in 2016, you set a goal to generate 5 Crores INR in the next 20 years for the specific purpose of your retirement.

This process of goal setting for a specific purpose will definitely reduce the probability of your mind or situations forcing you to break the investment set for retirement. Because, by setting specific purpose for your investments you will also slowly build muscle in creating systems by which any surprises / emergencies also will be taken care of so that your march towards that goal of generating 5 Crores INR in 20 years is not hindered.

Now when you see 5 Crores INR is generated in 18th year you won't (shouldn't) dilly-dally in greed thinking, "If I leave it for 1 more year, that 5 Crores INR may become 5.1 Crores INR, 5.5 Crores INR or 6 Crores INR." You will ( should) move the 5 Crores INR to an FD .

This is beauty of systems / discipline which will result in your mental space to be freed from worrying about money and instead spend time on what you love and what you want to create.

Now, you may ask:

What if in 20 years my investment did not make 5 crore rupees ?

 The answer would be -Equities, MFs have the potential to give inflation beating returns over long term and also have the probability of wiping your money out.

You are supposed to steer the money in funds and investments in such a way that it reaches 5 Crores. You cannot say, "I put money and sat in a  corner it should have given me returns."

This is where periodic review for switching to funds which give better returns and ditching the funds which do not perform comes in.

To give a metaphor:

Markets are like the sea. They can be calm or turbulent. They can take you to tropical paradise or topple you.

MF is like a ship or boat. You have to use the rudder (periodic review, switching to good funds, ditching low performing funds) to steer it where you want to go, and just to ride a storm or wave and not get knocked by it.

Hire a boatman (financial planner) AND ALSO ( not 'or') learn to sail it yourself. The boatman can jump off anytime but you won't because it is your boat/ money.

Meaning: Learn to DIY because you and only you will care about your money more than any Financial Planner. 

Go ahead and set some realistic financial goals. Clarify, refine, rinse and repeat as needed.

In the next post we will discuss more about short term and long term goals, why the classification is necessary and how that affects the way you invest.