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Sunday, 2 September 2018

Setting a Goal in Personal finance and its importance

Have you ever think if there is no goal post then what will happen to a football match? Similarly if we don’t have a financial goal than we will be in some unknown situation. So it very important to set financial goals and plan your cash flow to achieve them. Setting goals and sticking to them is the key to personal finance success. Getting to where you want to be requires Vision , workable plan and discipline to follow the plan. Goal should be realistic.  It should not be a dream. Goal should be actionable, we must have some tangible time line in order to reach there.

Let me give an example to explain how Goal and Planning work. Suppose you want to buy a house. For this you need to make the down payment. So first you need to decide the cost of home. After that how much do you want to make dawn payment the time line for the same. Let us assume you want to make a down-payment of Rs 25 lakhs in 5 years. So this is goal for you. Now you need a plan to reach there.

For 20 lakhs in five year you need to save some amount every month for sure. But the key question is how much money do you need to save, so that you can meet your down-payment goal?  If you expect to get 10% p.a. return on investment, then you have to save Rs.25614 every month. I have not taken effect of inflation. Now if you don’t have these figure then how can you reach the corpus? Make sure that your goals are achievable. It means if someone with salary 30000 per month then this goal is not a realistic goal. In this case he need to change the plan and  increase the time line or reduce the corpus required or both.

Now you have the goal and the plan. Now you need to start to execute the plan and stick to it. While execution you need track your goal on regular interval. At any point of time if you feels that the plan is not going according to the plan the we need to change the plan to achieve the goal. It may happen that your investment is not giving  the expected 10% return or the cost of the house is going to increase and you need some more corpus. In that case we need to rework our plan once again. But if the plan is working as expected then please don’t touch.  For better planning and tracing we should split our timeline to smaller milestone with target. In this case we can review our corpus in every 6 months if it in the line with our plan then go as per plan.

As we have discussed the plan for create corpus we must have plan for exit also. If you don’t have that then it may possible you missed the finish line with a margin. As you reach near to your goal you need to shift your corpus in safe asset class like liquid fund.

As we have discus a goal to make down payment we may have multiple goals. Some of the most discussed goals are

Create an Emergency Fund : An Emergency Fund planning should be our first goal. As an Emergency Fund we must have a corpus equivalent to 6 months expense. This must be kept in risk free and easily accessible asset class as FD or liquid fund.

Get Out of Debt – Completely Or Partially : it is a very important goal in everyone’s financial life. Most of us have one or two loan/EMI. If we reduce the out flow towards the Debt repayment then it will increase our allocation towards investment. This will help us to reach others goal quickly.

Early Retirement : Retirement is a truth for everyone who is  working. So it is better to plan it early. It the best if someone plan it on the day one of his working life. For this you need to calculate the cost of living after retirement with inflation. That corpus need more time to get ready. Most of us don’t like to think about this.

Hope this will help…

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