Determining Financial Goals for Women and Steps To Plan Their Finances
[Women and Financial Planning Series]
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Session 3: Determining Financial Goals For Women And Steps To Plan Their Finances
We are glad to have you with us for our 3rd Session on Women & Financial Planning series
Determining Financial Goals For Women And Steps To Plan Their Finances
Financial goals vary from person-to-person. Each one's outlook towards handling money, approaching personal finance is different; yet each one aspires for something or the other. Even in case of women, aspirational goals are increasingly becoming an integral part of managing their finances. However, there is a need to approach aspirations from a holistic perspective, so that it helps them to become financially independent. This includes budgeting prudently, getting debt-free, planning for contingencies, insuring optimally, investing wisely besides living a comfortable retired life.
In this session we'll provide insights on how women should go about determining financial goals and the steps they should take to plan their finances.
Alright, so let's get started and understand...
How to determine financial goals
All of us aspire something in life – be it buying a dream home, a car, giving the best education to children, getting them married in style, travelling abroad on a vacation, and living a stress-free and peaceful retired life. All these are financial goals, but for dreams to come true; prudent planning with responsibility is a must. Benjamin Franklin
, a well-known polymath, politician, writer and scientist has aptly said, "By failing to prepare, you are preparing to fail
You see, determining financial goals is the first step towards achieving them and making dreams come true. If you go wrong here, there are slim chances that you would be able to fulfil your wishes on time.
Here are the points to bear in mind while determining financial goals...
- Include your spouse while setting goals – Setting financial goals is an inclusive activity. Therefore include your spouse (or your life partner), while making a list of all the goals you wish to achieve. Your spouse might provide vital inputs which could change the characteristics of your financial goals and add new dimensions. Moreover, there could be many common goals (such as buying a dream home, planning a holiday, or children's future needs) that can be addressed jointly.
- Prioritise your goals – You may have a variety of goals, but ranking them in the order of their importance is critical! Only then will you realise the urgency of each, and work towards achieving them. For instance, saving to pay for your children's semester fees is far more important than buying an expensive smartphone. So, write down goals on paper and classify them as short-term (if they fall within 2 years), medium term (if they fall within 3-5 years) and long term (if they are more than 5 years away). Such an exercise may discourage you to use the money set aside for a particular high priority goal for any other aspect which is less important.
- Ensure your goals are 'S-M-A-R-T' (i.e. Specific, Measurable, Adjustable, Realistic, and Time-based). Let's discuss each, one-by-one...
- Specific: Goals ought to be specific. You should clearly know for whom it is intended at - whether self, or for children…and what do you want to achieve, the purpose, what do you require, what are the constraints, when will the goal realise and so on. Attach an approximate value to each of your goal so as to understand how much you need to save every month. And don't forget to account for inflation as it affects the purchasing power of your hard-earned money.
Remember, any vagueness while setting a financial goal could become an obstacle when you go out to achieve it. A vague goal would be 'To Become rich quickly'; but say if you append a value, and say, I want to accumulate assets worth Rs 10 crore by 2020, it becomes rather specific.
- Measureable: If you set targets and timelines for your financial goals, they can be measured. You'll be able to monitor your progress and give yourself a pat on the back at every milestone achieved. And with every piece of your goal successfully achieved, you'll be stimulated to do even better.
- Adjustable: Any unforeseen event can throw your goal off the course and put down your motivation to achieve it. So, ensure that the goals you set aren't rigid while you work towards achieving them. You may even consider a marginal deficit as normal.
- Realistic: While you aspire a variety of things such as travelling across the world, live in the most luxurious hotels, buying the most expensive clothes, driving a sports car, owning a bay-side Villa and so on, being realistic is imperative. You must know your means and live within them. Don't take risks when you can't afford to, and don't set yourself up for disappointment. If you set up financial goals that are basically a list of all your desires, you might be disappointed if things don't seem achievable. Remember, money is means to an end and not an end in itself.
- Time-based: Every goal ought to have a time-line; because without it goals cannot be measured. Saying I want to buy a car worth Rs 6 lakh is not time-based. But when you say: I want to want to buy a car worth Rs 6 lakh in the next two years; makes the goal measurable. This helps you do the math and figure out how much you need to save every month and invest in an avenue that'll make your dream come true. Remember, with no time frame there's no sense of urgency or yardstick to measure your progress.
Setting up S-M-A-R-T Goals helps distinguish between real wants and needs from daydreams. They act like maps in the path to achieving your vital financial goals.
Once you've finished setting / determining financial goals, tread the path forward.
Steps to plan your finances
- Start early and invest regularly -- Waste no time and start investing regularly to achieve vital financial goals. If you start early, with time on your side, you'll be able to plan for your long-term financial goals more comfortably. There are certain goals such as children's marriage or your own retirement that don't show-up immediately; but planning for them well in advance can leave you at an advantageous position. Mutual funds are an effective investment avenue to plan for your financial goals. Remember, the longer the time you have before the goal turns up for fulfilment, the lesser you will need to save each month since you may gain more from the compounding effect.
- Slice and Dice your investments -- Meaning, do not forget to allocate your assets among equity, debt and gold …and diversify your investments. This will reduce the risk to your investment portfolio. And while you select investment avenues, choose carefully after recognising your risk appetite, your financial goals, investment horizon, amongst a host of other facets.
- Instil the habit of budgeting -- A prudently drawn budget inculcates financial discipline and helps in allocating a sizeable portion of one's income towards long term financial goals and stays within your means. According to Dave Ramsey, "A budget is telling your money where to go, instead of wondering where it went." With the advent of web based software and mobile applications, budgeting has taken a whole new dimension.
- Be prepared for a rainy day: Meaning, have an emergency / contingency fund in place. In today's world, nothing is permanent or guaranteed. Hence it is extremely important to create a contingency fund which takes care of at least 6 to 24 months of your regular monthly expenses, including any EMIs. A contingency fund can be built by deploying money in a separate bank account or liquid fund offered by mutual funds. The emergency fund would be a cushion during discomfiting times.
- Aim to get rid of debt: Taking a loan is not a bad thing, as long as you know your means to service it. But too much debt can prove detrimental to your long-term financial wellbeing, especially when repayment becomes an issue. Hence assess your debt, and pay off the part which attracts high interest viz. credit cards and personal loans, and renegotiate terms with lenders. Use windfall incomes to repay the debt as much as possible, or find an additional source of income to do so.
- Get yourself optimally insured: Insurance is vital as you're planning for various life goals. So, get yourself optimally insured…and the best way to do it is purchase a pure term insurance plan with due recognition to the Human Life Value concept. Remember, the objective of purchasing life insurance is indemnification of risk to life; so don't mix insurance and investment needs. A pure term plan offers a better cost-to-benefit. Likewise have an optimal amount of health insurance coverage to avoid the bearing on your cash flow in case of hospitalisation.
- Plan for retirement: Given that women live longer than men, retirement planning is imperative. Hence start planning for retirement early, and consider diversified equity funds, or retirement saving funds, whereby with passage of time the compounding effect enables accumulating a sizeable retirement corpus.
- Consult a financial advisor / financial planner: If you are unable to think clear, seek the services of an unbiased SEBI registered financial advisor or a Certified Financial Planner who can support in the pursuit of accomplishing financials goals and plan your finances better by undertaking a thorough need-based analysis.
So to wrap our today's learning session, here are a few...
Points to Remember…
- The process of setting your financial goals is an exercise that will give you incredible insight into yourself and the things you value
- Ensure that financial goals set are S-M-A-R-T. i.e they are Specific, Measureable, Adjustable, Realistic and Time-based. This will help you distinguish real wants and needs from daydreams
- Include your spouse while setting financial goals; because goal planning is an inclusive activity
- Prioritise your goals – rank them in the order of importance
- Classify goals into short-term, medium-term and long-term – This would help you get a fair understanding of the investment horizon for each goal
- Financial goals, once constructed, are like a road map for the achievement of your objectives. They make your aspirations take shape and become achievable
- Invest wisely and regularly in productive investment avenues such as mutual funds to make dream come true
- Don't ignore asset allocation and diversification – This will help you reduce the risk to your overall investment portfolio
- Instil the habit of budgeting – It will help you save more invest a sizeable portion to meet your financial goals
- Don't forget to review your financial goals periodically
- Build a contingency fund to help you sustain during a rainy day. Consider liquid funds or keeping some funds in a savings bank account to do so.
- Taking too much debt can hinder your long-term financial wellbeing; thus aim to get rid of costly debt at the earliest
- Insure optimally while you endeavour to plan your finances
- Given that women live longer than men, plan you retirement prudently and as early as possible to accumulate a sizeable retirement corpus facilitated by the power of compounding
- Hone your outlook towards money to keep your financial health in pink
- (And last but not the least,) Consult an unbiased SEBI registered financial advisor or a Certified Financial Planner who can support your pursuit of accomplishing financials goals and plan your finances better
So to end our learning exercise today, we now invite you to test your learning by taking up this simple quiz (and win exciting prizes!)
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