Finance: Why is ‘Goal Based Financial Planning’ very important?

What is Goal Based Financial Planning?

If you ask anyone whether they wish to earn more money or not, the response would be a big ‘Yes’. If you ask them whether they know the strategy to retain their hard earned money or not, there would be a puzzled look. Adding on to this, if you ask anyone whether they track their personal finances or not, the answer would be a resounding ‘No’ although there may be exceptions. While savings is a native concept to Indians (millennial are going against this) financial planning is alien to many of them.

Although people generally save money in financial instruments, they are generally unaware of the following:

i) What the specific financial instrument is meant for?

ii) What purpose the saved money would be used for?

Now, goal based financial planning provides answers to the above questions.

Goal Based Financial Planning is nothing but planning the finances aligning to the goals, both short term and long term. Now, let us see the benefits of goal based financial planning.

Benefits of Goal Based Financial Planning:

Having defined the concept of goal based financial planning, let us see the benefits of goal based financial planning.

i) Better tracking of finances:

Most people don’t have the habit of formulating a monthly budget and tracking the expenses. This leads to a position wherein people find it very difficult to allocate a portion of their income towards savings or investments. When a person starts tracking the monthly expenses, it will create a better visibility of needs and wants. In this scenario, the wants can be postponed (or) eliminated thereby creating a space for savings or investments.

The next step is assigning the investments to specific goals. The goals may be short term or long term. This is a very critical and necessary step.

ii) Disciplined approach:

Discipline is an integral part of financial planning. Normally people start investing with much fanfare and after a while they lose track. This may be due to the failure to track monthly expenses or spending recklessly on wants. What is the panacea to this?

When a goal is fixed and financial planning is done towards that goal, it serves as a motivating factor to follow discipline.

iii) Plan for the rainy day:

The goal based financial planning cultivates the habit of planning for the rainy day or unforeseen emergencies. Normally, the financial experts recommend to have money equivalent to atleast 6 months of monthly expenses for emergency. Now, when the money to be set aside for emergency is tracked as a goal then it will serve as a motivation to allocate money towards emergency.

How to achieve the Goal Based Financial Planning?

Though this is not a universal to-do list, I am recommending it because I have followed it and it has reaped benefits for me.

Step 1: Formulate goals and segregate these into short term and long term goals.

Step 2: Decide the timeline and amount needed to achieve each of these goals as accurate as possible. (This is essential to choose the right financial instruments)

Step 3: Pick the right financial instruments and associate each to the individual goals.

Note: Not all the financial instruments may be applicable to all the goals. The choice of the financial instrument depends upon the timeline of the goals. For example, stocks may be a good option for long term goals having a time frame of 10–15 years whereas Fixed Deposits may be a good option for short term goals having a time frame of 0–3 years.

Step 4: Decide the percentage of allocation of money every month based on goal importance and time frame. Sometimes the importance of a goal may change during the course of its lifetime and hence the allocation for it must be revisited.

When these steps are diligently followed over a period of time, it will not only help you to move towards your goal but also will provide a greater visibility on the path towards the goal.

This is a journey which everyone must travel….