What are Financial Goals - Meaning, Types, and Benefits

Goals are important in life. They give you the energy and motivation to do extraordinary things. So, what are financial goals? A financial goal can change your perspective about life and money. You will start evaluating your everyday decisions in greater detail.

For example, you may not find anything unusual in spending Rs. 25 on the cheapest, regular coffee in the neighbourhood coffee shop. If you are habituated to having such coffees four times a week, you end up spending Rs. 100 each week.

On the face of it, this amount may look small. But if you invest that Rs. 100 each week (or Rs. 400 each month) even in a simple debt instrument (ROI 6% p.a.), your coffee money can grow to Rs. 28,000 in 5 years and nearly Rs. 4 Lakhs in 30 years. This goal can now help you decide each time you get tempted to hang around in that coffee shop. Now, imagine if you save Rs 4000 instead of Rs 400 per month.

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What are Financial Goals?

A financial goal is a scientifically defined financial milestone that you plan to achieve or reach. Financial goals comprise earning, saving, investing and spending in proportions that match your short-term, medium-term or long-term plans. Every financial goal will have the following three details associated with them:

- What is the purpose?
- How much money is needed?
- How much time? (usually in years)

Emergency funds, retirement corpus, home purchase, car ownership, debt clearance etc are all examples of financial goals.

Types of Financial Goals

Although you can have a wide variety of goals, you can broadly classify each of these goals within a specific time frame so that your priorities become clear. Categorizing as per time frame helps you visualize the goals and pace yourself accordingly. To ensure your life is planned and on track, you must focus on putting clear timelines when setting goals. This will make you more productive and effective. Here are 3 types of goals:

a) Short-Term Goals

Short-term goals are something you want to achieve in the foreseeable future over the next few months. These are required for your more immediate expenses. These expenses are generally smaller in scope and easier to project and predict.

b) Medium-Term Goals

Medium Term lies between short term and long term. Short-term goals have a typical timeline of a year whereas long-term goals are planned for a decade or more. You may have to achieve a series of short-term goals to reach your medium-term goals. Clearing outstanding dues on your credit card or personal loan can be classified under medium-term goals.

Medium-term goals are critical for evaluating your progress against your long-term goals. You can check whether you are headed in the right direction.

c) Long-Term Goals

Long-term goals require more deliberation, and in most cases, money. Retirement, buying a house, and funding a child’s higher education are typical long-term goals.

Examples of Financial Goals

Life is full of financial goals. It becomes easier if you know all your goals and works towards them. Financial goals are better in this aspect as you can simply put your money to work and achieve them. Here are some of the common financial goals:

a) Emergency Fund

Emergencies don’t come with a notice of warning. Damage to house or equipment, illness, accidents etc can strike anytime and need cash in hand immediately. Keeping all money in illiquid assets such as land, bonds, etc will not help. Setting aside some money in savings accounts, FDs that can be withdrawn quickly can be useful in building your emergency kitty.

b) Retirement

Retirement planning should begin as soon as one starts earning. If you have a longer runway, you can save smaller amounts each month, yet reach your targeted retirement kitty. When you have a particular amount (calculated rationally using projected expenses, income, etc), as a goal, you will get into the groove of saving for it in a disciplined and sustainable manner.

c) Buying a House

If you aspire to own a house, you must have a clear vision of the projected cost. A clear milestone can help you work backwards. For example, if you want to buy a 3BHK flat when you turn 35, estimate the cost and start saving for it. Even if you plan to avail a home loan, you will have to make some down payment and bear incidental expenses.

Even in the best-case scenario, presuming the financer covers 90%-100% of the expenses, you will have to plan to set aside money each month for EMIs. This implies you should not pick up other debts now or clear outstanding debts before you get there.

d) Child’s Higher Education

Quality education comes at a cost and this cost is increasing by the day, due to inflation and rising demand. Having a goal to reach a specific amount by the time your child turns 15 or 18 will help you build discipline in your savings.

e) Vacation

No, you don’t have to sacrifice your breaks and vacations. If you feel energized, rejuvenated and refreshed after a break, go for it. Even the old adage supports this. All work and no play makes Jack/Jill a dull boy/girl! What is important is to plan this well in advance instead of making it an impulsive decision.

f) Upgrade/Buy a New Car

Upgrading or replacing your car will be a lot easier if you plan it ahead. This is relatively easy because you know when you purchased your car. Even if you retain the car for the legally permissible tenure of 15 years, you know well in advance about the time to upgrade or replace your car.

If you currently ride a bike but plan to buy a car when you get married or have a child, say in 3 years, plan accordingly.

Buying things on loan is quicker but almost always more expensive. For example, paying Rs 12.4 lakhs for a car with an on-road price of Rs 10 lakhs. The bigger and longer the loan the higher your cost. However, look at replacing the unplanned loan with a planned purchase and you can make more money or even buy a better car (or any other asset).

How to Prioritise your Financial Goals for Investment?

Make a list of your NEEDS Vs WANTS. Needs are essential whereas Wants are good-to-have. You cannot compromise much on Needs because those may be essential for survival and well-being. Even within Needs, list out expensive items separately. You can classify both expensive and inexpensive items under different timelines so that you can pace your investments accordingly.

Ranking each item within the urgent-important matrix will give you further clarity on where your money should flow. Once this matrix is ready, look at your budget and start saving for the priority items in each bucket.

Financial Goals help Investment Success

When you have defined financial goals selecting appropriate investments becomes easy. For example, child education goals are best fulfilled with a child insurance plan. Then you can choose based on your risk appetite:

a) Guaranteed Savings Plan, if you want a fixed rate of return on your investments
b) Child ULIP Plan: If you can tolerate a little market variation or whether you are aggressive enough for equity exposure

Similarly, retirement plans will be an easy choice, for a defined goal. Retirement goals are often defined as a % of the income you will save. So, for example, if your annual income is Rs 10 lakhs, and your retirement need is 15% of your income, you can allocate a total of Rs 12,500 per month into:

a) Invest 4G ULIP plan for 99 years
b) National Pension Scheme or Public Provident Fund

Planning and knowing your investment goals gives you an edge with investments. Proper and disciplined investments are the path to a prosperous future.

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