Fixing an investment goal is an extremely important aspect of your financial planning. A lot of you actual financial planning depends on the goal you are choosing. Without a goal, any financial investment becomes meaningless like a ship without a radar which does not have any direction or purpose.
If you are starting your investment journey, then you need to understand the importance of having a financial goal and also set one for yourself. Let us begin by understanding what a financial goal is.
Financial goal is the term used to describe the future needs of an individual that requirefunding. It specifies the sum of money required in order to meet the needs and when it isrequired. Identifying financial goals help put in place a spending and saving plan so thatcurrent and future demands on income are met efficiently.
Goals described in terms of the money required to meet it at a point of time in future, iscalled a financial goal. For example, Rs. 3 lakhs required after five years for the collegeadmission for a child is a financial goal. Converting a goal into a financial goal requires thedefinition of the amount of money required and when it will be required. Other examples offinancial goals are:
• Rs. 2 lakhs required each month after 10 years to meet household expenses in retirement.
• Rs. 3 lakhs required after 5 years for a foreign holiday.
• Rs. 7 lakhs required after three years as down payment for a house.
• Rs. 1 lakh required after 6 months to buy a car.
As can be seen from the above examples, each financial goal contains two importantcomponents:
(a) goal value and
(b) time to goal.
The goal value that is relevant to a financial plan is not the current cost of the goal but theamount of money required for the goal at the time when it has to be met. The current costof the goal has to be converted to the value in future.
The current cost of a college admission may be Rs. Two lakhs. But after 5 years, the costwould typically be higher. This increase in the cost of goods and services is called inflation.While saving for a goal, therefore, it is important to estimate the future value of the goalbecause that is the amount that has to be accumulated.
Financial goals may be short-term, medium-term or long-term. The term to goal refers tothe time remaining for the funds to be made available to meet the goals. The investmenthorizon will determine the type of investment that will be selected for investing funds forthe goal. If the goal is short-term, low risk investments will be preferred even though thereturns will be low since the investor would not like to take a chance of losing the principleand return on the amount invested. As the time available for the investment increases, the investor will be able to take higher risks for better returns.
Now let’s dig into the steps involved while setting up your financial goal.
Table Of Content
How to Set Your Investment Goals (Step by Step Guide)
- Write down your goals
- Funding your goal
- Risk Profiling
1. Write down your goals
When you are planning to create an investment goal for yourself, create a list on paper in bullet points and alsomention the time period by which you have to fund that goal. This goal can be one of the above examples or any other goal you may have- either short term or long term.
2. Funding your goal
Thenext step is to fix how much amount can you invest on a monthly or lump sum basis to fund that goal of yours. Funding goals will depend upon the existing investments and assets that are available to meet future goals and the ability to save which will depend upon the current level of income and expenses of the household, and the liabilities of the individual which are the obligations that have to be met out of their available income.
3. Risk Profiling
Your financial risk tolerance - attitudes, values, motivations, preferences and experiences, is measured with a risk profile. The risk profile questionnaire helps in understanding the risk tolerance levels of a client. Risk tolerance is the assumed level of risk that a client is willing to accept. Financial risk tolerance can be split in two parts- Risk capacity - the ability to take risk and Risk attitude- the willingness to take risk.
Conclusion
After following these steps, you will have clear investment goal set before you which will be in line with your current financial situation. Next, you will have to actually plan your investment, which will include selection of assets, creating portfolio and ultimately reviewing and rebalancing it on a regular basis till you finally achieve your financial goal.
