Outlining Goals Can Lead to Better Financial Planning

The sudden global spread of the pandemic has inflicted economic pain, leading to corporate salary cuts and even layoffs in some of the affected sectors. Uncertain times like these underline the importance of having an emergency fund and a financial plan in place to secure the future. 

It is encouraging to see Indians becoming more aware of financial instruments. Still, for an average Indian, financial literacy is yet to become a priority. As per a global survey by S&P, less than 25 per cent of adults in India are financially literate. 

While Indians have shown some inclination towards financial savings (now comprising ~35 per cent of household savings in our country), most save on short-term instruments like bank deposits, which do not play a role in meeting life stage goals. And these goals are not merely markers of life stages, thinking of them proactively leads to long-term and disciplined savings, and thus, better financial outcomes.

How Does a Goal Help?

Most individuals have a ‘Spend first, Save later’ approach. Youngsters today, often at the start of their career, get burdened with credit card payments or EMIs for lifestyle goods. This leads to a negligible surplus towards investments. However, if you set your short-term and long-term financial goals, determine the amount you need to save for them, and stay committed to the plan, you can achieve these goals without burdening yourself and even end up richer in the process.

However, it is critical to ensure that the goals are realistic, have a specific time horizon, and keep in mind the current and future needs of you and your family. 

Types of Financial Goals 

There are two types of financial goals – short-term and long-term. Short-term goals usually have a shorter horizon of 3–5 years. These goals are more at an individual level such as buying a gadget, car, going on an international vacation, saving for higher education, planning a life event such as a marriage. 

Long-term goals usually have a time horizon of over 5 years. These include buying a house, children’s education, children’s marriage, retirement planning. One may even want to leave behind an inheritance for their loved ones, which is also a long-term goal.

Instruments for Achieving Financial Goals

As a first step, you should ensure that your family is adequately protected with a Term insurance plan. It is a small expense that ensures that even if they were to lose you, they can continue pursuing their goals and aspirations without money becoming a problem. While I’ve mentioned this as the first step, it will rarely be so. Thinking of one’s own death isn’t a pleasant experience and hence people procrastinate. Yet, I cannot emphasise enough the importance of a Term plan, without which, it would be like walking down the streets of Mumbai on a July afternoon all dressed up, but without an umbrella handy.

Once you protect your family, you can evaluate the various financial savings and wealth creation instruments available like FDs, post office savings schemes, life insurance savings products, MFs, equities, PPF, EPF, NPS. While some of these offer tax benefits, it should not be the only reason to choose a particular instrument. Multiple factors like age, income, risk appetite and assets and liabilities should be considered while choosing an investment instrument. 

If this begins to feel cumbersome, you can take the help of a financial planner or use tools and calculators that are freely available on financial websites. These help to better understand one’s risk appetite, short-term and long-term needs, thereby, enabling one to identify goals. 

For achieving long-term financial goals, one needs to save and invest systematically, in a regular disciplined manner. The power of compounding plays a significant role in the process of wealth creation over the long term. Life insurance plans, NPS are well suited for such goals with a range of products that suit different risk appetites. 

Conclusion

Outlining your financial goals enables you to get started in the right direction. With a disciplined approach, regular monitoring, and suitable asset allocation you can achieve them all. 

The author is the CEO of HDFC Life

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.