Having Knowledge of the Finish Line
Most of us tend to take a product first and process the next approach when investing to achieve our financial goals. In other words, we frequently devote the majority of our attention to selecting the right investment products before attempting to structure our financial objectives around those products. The most important component of investing, though, is actually goal setting. It would be similar to running a race without knowing the course and the location of the finish line to purchase investment goods without first determining our financial goals. Therefore, when developing our financial plans, we should spend the majority of our time and energy prioritizing, setting, and quantifying (determining how much money we need) our financial goals. A lot of careful judgment is needed for each of the three factors. And I'll discuss each of these elements in detail and demonstrate how to handle them successfully in this piece.
Having a clear understanding of what we want to do with our money and writing it down is the first step in effectively setting our financial objectives. It would be crucial to state all of our goals at this stage, along with the timelines by which we hope to accomplish them. So, for instance, we might write down our aim of retiring in 15 years when setting it as a goal. That would help us estimate the amount of time we have to prepare for each goal.
We can then prioritize our goals after laying out our financial objectives together with their deadlines. The degree of real value that achieving each objective would give to our lives must be the main consideration when ranking our financial goals in order of importance. Our financial goals can be divided into two categories, necessary goals, and aspirational goals, depending on this criterion. Planning for retirement, our children's education, and/or marriage are examples of essential objectives. The majority of people share these objectives, and achieving them can significantly improve one's happiness and well-being. Aspirational goals, on the other hand, are more subjective and unique to each person.
Such objectives can include getting a new car or house, organizing a trip, and so forth. Any happiness brought on by reaching these objectives is usually only going to last a short while. Therefore, when setting our financial priorities, we must never put our aspirational goals ahead of our fundamental objectives. As a result, before making plans for our aspirational goals, we must first make sure that our primary goals are well-defined and have a solid foundation. Additionally, we must be careful not to compromise our future investments in order to achieve our fundamental goals by using money to achieve our aspirational goals. Choosing between two essential goals or two aspirational goals typically causes disagreements with our families when we prioritize our financial goals. For instance, some of us might want to prioritize retirement planning while our spouses might want to prioritize planning for our children's education.
Finally, setting our financial goals in order need not be a one-time effort. We should review how our goals are prioritized and make adjustments as needed as our financial situations and real-world conditions change. For instance, if I lost my job just a few days or a week before I was going to buy a new automobile, I might need to postpone that purchase and use some of the money to cover expenditures until I found new employment.
Quantifying our financial goals is the final aspect to consider when setting them. Finding a reasonable estimate of the sum of money needed to achieve each of our financial goals is the first step towards quantifying them. And since it enables us to specify the destination for each of our goals, this is the step that is most crucial in the process of establishing our financial objectives. While quantifying our short-term objectives is rather straightforward, doing so for our long-term objectives presents more of difficulty. This is due to the fact that we would have to take the impact of inflation on the costs of our long-term objectives into account. The best method to accomplish this is to start by calculating the current cost of each of our financial objectives.
The next step is to calculate an accurate estimate of the rate of inflation that will likely apply to each target. The current cost of each goal must also be changed over the course of our whole investment horizon at the appropriate rate of inflation. Let's take the scenario where I want to start a degree that will cost Rs 10,00,000 in 15 years and want to enroll myself in it. Applying the rule of 72, which illustrates how quickly a certain amount of money doubles itself and is provided as 72/Interest Rate, the cost of achieving my goal would double approximately every 7 years (72/10 = 7.2) assuming that college prices experience inflation at a rate of 10%. So, after 15 years, I'd need a little bit more than Rs 40,00,000 to pay for the course of my choosing.
However, it's important to keep in mind that no matter how much money is needed to achieve each of our goals, we would still be limited by the amount of money we can afford to set aside and invest each month. We would therefore need to evaluate how well we could accomplish our objectives with our current monthly investment amounts. Increasing our monthly investment amount may be necessary if we are unable to get the desired results at the current level. Even after the biggest increase, if there is still a gap, we may need to consider slightly less expensive options or partially fund our objectives. For instance, if an MBA abroad costs Rs 1 crore around the time we are scheduled to start the course and we have only been able to raise Rs 50 lakh, we may consider pursuing an MBA in India, which would cost less than Rs 50 lakh, or we may choose to pursue the overseas MBA, for which we would pay Rs 50 lakh and raise the remaining Rs 50 lakh through a student loan. We shouldn't let the fact that we can only partially finance our goals stop us from making plans for them because, in that case, we could have to borrow the full amount or give up on the goal altogether.
The significance of establishing financial goals before making plans for them should be abundantly clear by this point. Setting financial goals at the outset of our financial planning activities would ensure that we are always conscious of our end goals. It would enable us to consider our investing decisions. Additionally, it would imply that we structure our portfolios in accordance with our financial objectives, improving the alignment between the two. All of this would make sure that we always understand why we are acting a certain way when it comes to managing our finances and pursuing our objectives. And it is the main benefit we can anticipate deriving from the process of establishing our financial goals.