Setting Financial Goals - Like Darts to a target

Financial Goals – Do You Need Them?

“The significance of a man is not in what he attains but in what he longs to attain “- Kahlil Gibran

Whether you have managed to assess your “financial health” or are generally looking to improve your financial situation, it is important that you spend some time thinking about your specific financial goals.

Whatever your personal circumstance, making financial decisions involve a lot of uncertainty. All these individual decisions, accumulated over the long-term, have a big impact on your financial situation. So, if you are to spend time making detailed plans for your financial life, you need to know that there is an end goal that matters to you. Once these goals are in place, you can evaluate whether you are making progress towards that goal.

Some goals can be of many types. Some are relatively simple to state – such as:

  • Paying off a personal loan
  • Saving up for a down-payment on a new home

They can be short-term or long-term. The goals can also relate to a need to pay for special things in life. For example:

  • Planning for a daughter’s wedding
  • Ensure your children’s educational needs can be met.
  • Having sufficient money set aside for a comfortable retirement or
  • Giving back to your community for a cause.

How do Financial Goals Help?

Managing your personal finances is in essence a series of financial decisions over time. These decisions can be small or large. Even the smallest decision – such as deciding on whether you want to cook for dinner or go to a restaurant – has a financial impact. Having a set of clear prioritized financial goals helps you make these decisions a little more easily. The goals help give you a context within which to make your decision. They help you identify the opportunity costs more clearly. This allows you ensure the decisions you make are heading in the correct direction. If achieved, these goals will give you access to all the opportunities you are looking for over your lifetime.

Are my Financial Goals Correct?

Setting financial goals are an intensely personal choice. They are an expression of who you are and who you want to be – if at least in a financial sense. Does this mean that everyone should have the same goals? No. It just means that the right goals are those which enable you to realize your own personal choices. Furthermore, the right goals will create opportunities for yourself and give you even more “options” later. For example, you set a goal to save a specific amount. You may not always know now what specifically you are saving for. But once you have significant savings in place, it may allow you make choices such investing in your own business. This goal may not have initially been an option for you.

If your goals involve a family, it is imperative that you and your spouse/partner are also aligned to similar financial objectives. If not, this will lead to potential problems when you are both trying to prioritize spending and make financial decisions for your family.

Your Financial Goals will change over time. As your personal choices and circumstances change, you will need to review and update your goals accordingly. In order to come up with specific foals, you will have to make educated guesses. These “guesses” and assumptions are required to help set some boundaries to your goal. However, what is most important is that they are SMART financial goals.

SMART goals are:

Specific & Measurable

The more specific the better. Establish clear criteria that allow you to measure progress. For example, a goal to “save more” is not as good as “save $ 1000 by Year 2”.

Achievable & Realistic

The means of achieving a goal will vary from person to person – but the goals need to take into account what you are both willing and able to do. Setting your financial goals must be realistic but it can be an optimistic goal to stretch you as well. It is sometimes dispiriting to set yourself targets only to fall short each time just as it can be less motivational to set goals that are very easy to meet. So, resist the temptation to set overly optimistic or pessimistic goals, but stick to the principle of setting goals in the first place.

Time Bound

Having a goal that has a specific time frame is very useful. Knowing the time-frame by which you want to achieve a given goal helps select the tools used to achieve those goals. These time frames need to be realistic. For example, Those who are just beginning to work for a living have years to save whilst those who are approaching retirement clearly do not have time on their side. Anyone of that age without any significant savings set aside faces some urgent questions. Remember also to keep any assumptions you make need to be within the realms of reality. For example, assuming your savings will earn an interest of 50% per annum may not be very realistic if the returns over the last several years are less than 10%. It is theoretically possible, but unlikely.

Some Milestones to Consider

There are some general rules in financial management that you can take into consideration when you set your own targets. As mentioned, your goals are a personal choice, but the following points should give you some guidance on the “norm”.

Regular saving is essential for anyone hoping to be able to meet their financial obligations throughout their lives, before and after retirement. In addition, you should seek to begin an emergency fund that can be used in the future if anything unexpected happens. Some other points you should have in mind:

  • In an ideal world, you want to aim to have accumulated a fund that is three times your annual income by the time you are 40, and continue to accumulate more on an ongoing basis. That fund does include any equity that you may have in property. It is important that if you need to re-mortgage that you revise your calculations if you are taking any of that equity for use elsewhere.
  • If you and your wife are both working then you should attempt to get to the position where one of your incomes can cover all your regular expenses. That will provide you with scope to pay for the special things that arise from time to time.
  • As you go through life and earn more money that should give you scope to save more. If your standard of living rises, so will your expectations in retirement. Ideally you should be saving 10% of your earnings as you set out on life but you should have a goal to increase that percentage gradually as you go through life. 15% is usually a minimum at middle age.
  • It is nice to be a two car family but is not always a necessity. If it is, you should aim to not be taking out a loan on more than one of them.
  • Property is a great investment over the medium to long-term. You cannot predict growth but you have to make an estimate and aim to own a property that has a value of double or more than your annual salary but not have a mortgage of more than 80% of its value.

Financial Goals in Sri Lanka

Setting your goals do not have to be region specific. However, you must consider several factors that may affect your financials based on your country of location. These factors include:

  • Inflation – Inflation tends to reduce the value of savings (and increase the value of real assets, such as property). So, if you live in a country that has high inflation, you must take this into account. Over the last few years, Sri Lanka’s inflation rate has ranged between 5-7%. This rate has been higher in the past. Any return on your savings needs to exceed this rate for you to have any “real” benefits.
  • Social Welfare – In several countries, there is often a social welfare plan that ensures some level of financial protection. For example, in the UK, there are unemployment benefits provided to people who have lost their jobs. This type of system allows the individual to take more risk in striving for their financial goals. Sri Lanka currently does not have similar benefits. So, when making your plans, you need to take into account the need for emergency funds for unexpected situations.

Regardless of the country, if you set your targets well you have taken a significant step forward to improving your financial health. To consistently work towards achieving them, you need a budget. Click here to learn all about budgets.

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