How to create a framework for your long term financial goals - Motilal Oswal
How to create a framework for your long term financial goals - Motilal Oswal

How to create a framework for your long term financial goals

Personal financial planning is the key to realizing your long term goals. What you need to understand is that your financial plan requires a framework. A framework is a formal structure which ensures that there is a high probability of realizing your goals. What do we understand by financial goal setting? How to create a financial goal? Let us go about understanding with some personal financial goals examples. Here is a framework for your goal and your financial plan overall

 

Set out your goals

The first step is to set out your goals. Make it a point to write them down and document the same. A financial goal is different from your dreams. A dream is just an expression of intent but a goal actually sets out a financial deadline for the same. Saying that you want a comfortable retired life is a macro statement of intent. When you set a goal you need to understand how much money you will need on retirement, at what age you will retire, how long do you want your corpus to work for you etc? Once the goals are crystallized and a financial value is assigned to it, the rest of the steps will follow.

 

Set out the milestones

Even if the goal is for the long term, you need milestones to make these goals measurable. Your retirement may be 30 years away but you need to review at least every 5 years how you are progressing towards these goals. These milestones will help you to determine whether you are on target or not. Secondly, there are certain goals that will have goalposts. For example, when you are planning your child’s education then the milestones will be in the form of a set of goal posts. You need funds to put your child into college and then you need funds on a continuous basis to see your child through college. It is not just the quantum of funds but also the timing of the funds that will matter.

 

Work backwards for the investment mix
Once your goals are defined and your milestones and goal posts are set, the next step is planning backwards. If you require Rs.3 crore after 30 years then what does that mean in present value terms. Obviously, you are not looking at a lump-sum investment but you will be looking at a SIP to achieve these goals. When you structure SIPs ensure that it is a mix of equity and debt. You need equity for higher wealth creation and you require debt for stability and regular income. Also ensure that you tweak your investment mix as goal posts approach. For example, if your retirement corpus is in equity funds then shift to debt funds at least 3 years in advance and shift to liquid funds at least 1 year in advance. This will ensure that you do not suffer liquidity reverses.
 
Reduce risk through insurance

Your entire financial plan and goals are based on the assumption that you will be around to ensure that all these goals are achieved. But, we do live in uncertain times and you need protection from such uncertainty. That comes from insurance. You need adequate term cover to ensure that these goals are taken care of even in your absence. More importantly, ensure that your liabilities also carry term cover so that you are not forced to lose your assets in the event of any untoward incident. A very important point to remember here is to keep your investments and insurance separate. Don’t opt for endowments and ULIPs which are inefficient ways to manage your risk. Stick to pure risk covers.

 

Monitor your plan

This is the last and most important part of your goal setting and financial planning framework. Your goals could undergo a change for a variety of reasons. For example, costs may go up or your inflation assumptions may have been too conservative. Alternatively, your assumptions on equity and debt fund returns may have been higher. There are also tax considerations that could creep in. For example, equity funds now attract 10% tax without indexation. Hence you need to either tone down your target goals or you need to increase your monthly SIP savings accordingly. These things become obvious only when you regularly monitor the plan.

 

Remember, goal setting and financial planning cannot be random. It has to be a very formal and predetermined framework within which you must work. This framework must include ultimate goals, goalposts for measurement and milestones for review. That is where your framework for financial planning and goal setting is complete.
 

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