The Second Step of Financial Planning

As the movie Badlapur tells its audience — “Do not miss the beginning”, we also advise that you go through our thoughts/insights shared in the previous article covering the first step of financial planning -

Once you know yourself, which stage of life are you at, where do you want to go, what is your risk appetite etc. it is time to move on to the next step of Financial Planning. This stage forms the foundation of the plan and getting this right is of utmost importance. This is the Goal Setting stage — wherein you decide upon your financial goals and where you need to be in terms of finances in order to achieve them.

The Second Step

The second step of financial planning is to create your financial goals. This forms the bedrock of your financial plan. Knowing where you want to go will not only dictate how much money you need but also the asset class in which you need to invest. Therefore, setting goals is highly critical. Here are a few pointers that will help you in setting your financial goals.

1. Write down your goals — with your own hand

Somehow writing something down the old-fashioned way of using pen and paper adds to the determination of achieving that goal. This is because you have written something with your own hands. Make that commitment by putting your goals in writing. Then place that goal where you can see it most often, this will give you the drive and the focus to ensure you achieve them.

2. Make it specific

Saying “I will save tax this year” is not enough. You need to do a bit of homework and make a specific goal which is something on the lines of “I will invest in Tax Saving Funds or ELSS (Equity Linked Saving Schemes) and claim the full deduction of ₹ 1,50,000 under Section 80C.”

3. Make them actionable

If you want to claim full deductions under Section 80C of ₹ 1,50,000 that means you can start a SIP in an ELSS or Tax Saving Fund of ₹ 12,500 every month. Breaking your goals into smaller, time-bound targets (like monthly) will keep you motivated when you cross each milestone of the calendar.

Types of Goals

Usually, we divide financial goals into 3 parts:

1. Short Term Goals — Which can be achieved in 1–3 years. For example, planning your taxes for the year or setting up a Contingency Fund.

2. Medium Term Goals — Which can be achieved in 3–5 years. For example, buying that new car or going for that international family holiday you’ve been wanting to take (assuming that COVID is well and truly history)

3. Long Term Goals — These are goals that require a timeline of 5 years or more. For example, planning for your retirement or your child’s foreign education etc.

The sturdiness and sustainability of a financial plan is a function of the goal-setting exercise and depending upon the goal and the timeframe you wish to achieve– you will have to invest in the right asset class that will ensure that you have enough money when you reach the threshold of achieving that goal.

Once you set goals then the next step will be outlined in the next article! Keep watching this space for more on Financial Planning and how you need to go about it.