The Importance of Setting Financial Goals and How to Set Them

Imagine that you are on a road trip and you don’t have a map or didn’t set any destination. You will keep roaming wasting time and fuel. The same applies to your finances. Without clear financial goals, you will end up in endless loop of earning and spending with little or no savings. Here is a crucial information and practical guide on how to set and achieve financial goals to enjoy a stress-free life.

Why are Financial Goals important

Financial goals don’t just drive your money but it also:

• Help you prioritise your spending and savings. Assist you in taking informed decisions about how to allocate your resources.
• Keeps you motivated to save and manage your money wisely through clear targets.
• Gives you a sense of control over your finances, reducing stress and anxiety about money.
• Gives you defined goals that can be tracked to check your progress and make changes as needed. This will give you visibility into your current status and keeps you committed.
• Play crucial role in improving your overall financial health and security.

Examples of Financial Goals:

Financials goals can be short term (set to be achieved in a year), medium-term (for slightly longer periods of 1-5 years) or long term (achieved in 5+ years). Here are some examples:

• Short-term: Building an emergency fund, paying off credit card debt, saving for a down payment on a car.
• Medium-term: Saving for buying a house (like downpayment for loan), saving for children’s education, clearing off the student loans.
• Long-term: Saving for retirement, purchasing land, building a farmhouse, developing wealth through investments.

How to Set Financial Goals (The SMART Method):

A proven and helpful framework for setting effective financial goals is the SMART method:

• S - Specific: The goal should be clear and well-defined. Instead of ‘I will save more money’ consider ‘I will save ₹60,000 to be used as fund for purchasing a car.”
• M - Measurable: The goal should be easily trackable. For example, “save ₹5,000 a month”
• A - Achievable: Goal should be realistic and attainable given a person’s current income and expenses. One shouldn’t set goals which will leave less money in hand for regular expenses.
• R - Relevant: The goal should align with your values and overall life plan. Is saving for a car the right priority for you right now?
• T - Time-bound: A goal should always be set with deadline for achieving it. “Save ₹60,000 within 12 months.”

Example of Setting a Financial Goal:

Let’s say your monthly income is ₹80,000 per month and you want to save for a down payment on a car in a year. Here’s how you can apply the SMART method:

• Specific: Save ₹60,000 for a down payment of a car.
• Measurable: Save ₹5,000 per month.
• Achievable: Based on your current income and expenses, set realistic target.
• Relevant: Owning a home is a high priority and relevant for a household than spending for movies.
• Time-bound: Achieve the ₹60,000 goal within a year.

Steps to Setting and Achieving Financial Goals:

1. Assess Your Current Financial Situation: First assess your income, expenses, assets, and liabilities. This will give you a clear idea of your financial condition. Create a budget to track your spending.
2. Identify your Priorities: Decide what’s most important for you. Is it buying a house or retiring early or traveling the world. Your priorities will determine your financial goals.
3. Set SMART Goals: Use the SMART method to define your goals clearly and execute them committedly.
4. Create a Plan: Prepare a detailed plan along with details on how you are going to achieve each goal. It includes creating a budget, increasing your income or reducing your expenses.
5. Track your Progress: Keep monitoring the progress toward your goals. This step will help you stay motivated and make adjustments as needed. Use budgeting apps, spreadsheets, or online tools to track your income, expenses and savings.
6. Adjust as Needed: Life won’t go as planned always. There will always be unexpected changes. Be prepared to adjust your goals and plans as circumstances change. Don’t be discouraged by setbacks. View them as learning opportunities.
7. Celebrate Your Successes: Acknowledge and celebrate your achievements along the way. This help you stay motivated and confident to continue your goals. It will build up positive financial habits and helps live stress free.

Conclusion:

Setting financial goals is an essential step towards achieving financial security and realising your dreams. By using the SMART method and following the steps outlined above, you can create a roadmap for your money and take control of your financial future. Remember that financial planning is an ongoing process. Regularly review and adjust your goals as your circumstances and priorities change. With careful planning and consistent effort, you can achieve your financial goals and build a brighter future.

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.