The importance of financial goal planning

When it comes to financial goal planning, typically goals can be classified as essential or non-essential, such that disposable income can be prioritised accordingly. In this journey of goal planning, always start with creating an emergency fund such that one does not end up using the funds earmarked for some other goals to meet short-term disruptions. Basis the timeframe of the goal – short, medium or long term - suitable investment vehicles have to be identified. While at it, adhere to asset allocation such that portfolio volatility is minimal while returns tend to be stable and predictable.

One must keep the following aspects in mind when goal planning:
1. Factor in inflation
To understand the sum required, start with the current price of the goal, and add to it the potential inflation leading us to the amount required. This step is crucial for meeting long-term non-negotiable goals like a kid’s education and retirement. In case if there is a spike in inflation, the target amount is bound to increase further. A realistic estimate of inflation is the average of the last decade.

2. Return Expectation
The second step is to figure out a conservative estimate of returns expected based on the asset mix of our investments, over the period of the goal. This is a dicey step as there could be wide variations in economic scenario of the country/markets that one invests in. In any case, this will help us arrive at the estimated amount(s) that one will need to put aside at present. At this step, it is better to be conservative. Here too, one can take the average return of the past decade to take a call on the return estimate.

3. Investment Amount
Now, it is time to assess how much money one can put aside today and in the future. The equation of Income - Investment for goal planning = expenses should be followed for best results. Certain goals like retirement planning (considering a modest lifestyle) plus a fund for medical emergencies is a requirement that cannot be avoided at any cost. So, the sooner one begins planning, the better it is. This will keep you from splurging and remind you constantly about future monetary requirements. A wise saying goes – If you keep buying things that you do not need, a time will come when you may have to sell things that you need too.

4. Track Progress
Tracking the progress of your investment is an exercise one needs to undergo atleast once a year. This will help one decide if there is a need to increase the investment amount due to factors such lower than expected return, persistently higher inflation, chosen investment avenue consistently underperforming etc. In case any corrective measures are to be taken, then one can initiate those in a timely manner.

5. Reduce risk as the goal nears
If a financial goal is 3-4 years away, then it is important to transfer the corpus generated from riskier asset class to debt mutual funds. Otherwise, intermittent market volatility may cause unnecessary hassles forcing one to either borrow to make good of the shortfall or postpone the goal spending.

Other Benefits
Planning and investing ensure there is always an element of discipline. Gradually, over time investing becomes a habit. Another by-product of discipline is one does not get swayed by short-term market movements or performance swings. One is always looking at the final goals when reviewing investments. For example: While driving at high speed may help you arrive at the destination early by a few minutes, there is a disproportionate amount of risk attached and a possibility of jeopardizing the goal itself in the form of an accident. Similarly, lured by higher returns, one should not increase the risk in investment.

Another major benefit is that it provides a much-needed reality check. For example: If one desires an early retirement, but the present income and future growth (projected) do not allow it, then one will be aware of it early on and alter plans accordingly. In such an instance i) Try and increase income and put aside more money ii) Increase retirement age or iii) Moderate aspirations.

Disclaimer : This article is authored by Srinivas Rao Kasinathuni, Mutual Fund Distributor.The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India.