How to go about goal based financial planning ?

The first step in setting up your financial goals is to chalk out those occasions in life when you will have to shelve out a large amount of money which your regular income cannot meet. It’s a no brainer that on occasions like marriages, education, international trips and retirement, you will need a lump sum amount of money to spend which your monthly salary will not be able to cater for.

Steps in setting financial planning goals or goal based investing :

• Step 1 – List down all your future financial goals – these are occasions when you need a large sum of money.

• Step 2 – List down the time frame as to when these will occur.

• Step 3 – Document the current expense for these – how much you need to spend if this goal were to happen today.

• Step 4 – Calculate the future value of this goal with an inflation figure.

• Step 5 – Calculate how much you need to save each year/month for this goal. For this you will assume a rate of return which will depend on how far your goal is and which investment method you chose.

Invest for your goal in a suitable investment class

It must be noted that goals can be short, medium or long term in nature.

Examples of short-term goals could be :

1. Pay off a home loan in another 1 year

2. Plan a major birthday bash for your child next year

Examples of medium-term goals could be :

1. Buy a car in another 3 years

2. Revamp the interiors of your house in 4 years

Examples of long-term goals could be :

1. Save for retirement

2. Save for child’s education

3. Save for child’s marriage

4. Plan for an international trip

It is very important to note that the rate of return and where you invest will largely depend on whether your financial goal is short-term, medium-term or long-term in nature. While equity is considered the best way to invest for long term goals, for short-term goals, debt is more desirable while medium-term goals can have a mix of both