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How to decide your financial goals? Use this 5-step approach.

If you are wondering how you can convert a life or lifestyle goal into a financial goal, then here’s a simple approach that can help you with that.

If you are wondering how you can convert a life or lifestyle goal into a financial goal, then here’s a simple approach that can help you with that.

#1. Does your goal involve money?

Not all goals involve money, whereas others are all about money. Know the difference. Let’s say you want to take a sabbatical next year, this is a life choice but also needs financial support to enable you to go through with the decision. Such a goal needs money for sure.

#2. Once you know your goal needs money, the next question is how much?

Figuring this out might be more straightforward for some goals than others. For example, if you want to buy an apartment, it is a cost that can be known relatively quickly. For long terms, financial goals like financing your retirement or finding out how much college education will cost for your child, it isn’t as straightforward.

Each of these goals needs you to understand multiple factors like inflation, your rising expenses – lifestyle and otherwise, different rates of returns on investments, and last but not least your own ability to save.

Take the help of planning calculators available on the internet or if the cost is crucial as well as complex, take the help of a qualified financial adviser to figure out how much you would need for a goal.

You might wonder what can be considered big or small financial goal here. One useful way is to find if you can save for the sum required in less than 4-5 years. Then, it is a relatively “small” financial goal. Anything more would generally mean a big financial goal

The next step is finding out when. Interestingly, the “when” may depend on “how much”. Large sums generally need more time to save up for a while smaller amounts need a lot less time. Remember this if you are considering when you need the money. 

#3. Decide, or find out, when you need the money

The next step is finding out when. Interestingly, the “when” may depend on “how much”. Large sums generally need more time to save up for a while smaller amounts need a lot less time. Remember this if you are considering when you need the money. 

Some proactive thinking is needed at this stage because, often, you won’t have control over the “when”, especially in case of retirement or a child’s education. More considerable sums needed years later, also require you to invest in instruments that beat inflation. 

#4. Can you save or afford to save for it?

Some financial goals in life are non-negotiable. Saving for retirement is one because very few professions allow you to work until your last breath. Most people wouldn’t want to anyway!

Other financial goals need you to consider if you can afford them. You might want to send your children to an ivy league, but the costs are such that most investment plans for such a goal would need a substantial monthly saving dedicated to just this goal.

If a financial goal is important to you (could be anything, as it depends on your life values and objectives), then you need to prioritise that goal over others. Most of us can’t afford each and every financial goal we might come up with as our savings will be limited.

#5. Will investing enable you to reach the goal amount?

The last step, once you know you can and want to save for the financial goal, is to decide if investing is needed and where should you invest your savings. Think of investing as bridging the gap between what you can save and how much you really need. For example, you might be able to save about Rs 1 crore over 20 years, but you may need Rs 2.5 Cr for retirement. Where do you arrange for the extra Rs 1.5 Cr? 

Investing in equity might help you here. Equity, as an asset class, tends to double savings in about six years. Over 20 years, your money might double two or three times. Investing, quite simply, helps you ensure that your savings will get you where you want to go.

If you can save an absolute minimum, as dictated by your financial goal, investing can help you get to your goal in time.

You are all set! Follow the above-listed steps, and soon, you will be achieving your financial goals in no time at all.

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