I have joined various Facebook groups that talk about insurance, stocks, and other investment products. Having been a part of most discussions, my observation is that members of different groups have different questions.
- Which is the best term insurance policy?
- Which are the best mutual funds to invest in for long-term financial goals? (By the way, long-term for most members of these groups refers to a period of up to 3-4 years)
- Should I buy health insurance if I am already covered by my employer?
- Should I invest in Stocks for long-term financial goals?
- Which is the best stock to invest in?
- Should I buy personal accidental policy?
Now, 80% of the questions are concerned with returns i.e. how much will I get?
It seems fine, but there is a problem here. The majority of people do not define their financial goals. They invest in different financial instruments just for the sake of better returns.
10 days left of lockdown. Here is the list of previous 5 articles in a series of 15 articles (one each day) to help you become a DIY investor.
- Emergency Funds and how to invest it?
- Importance of term insurance in time of crisis.
- Health Insurance beyond corporate cover and why you need it?
- 5 Financial formulas in excel for personal financial calculations
- What is your risk profile- Cautious/Moderate/Aggressive
Let me take an example to make my point clear. Suppose your child`s education goal is only 3 years away, would you still invest in equity mutual funds? A sensible investor will straightway say no. It’s so because you would need a definite amount for your child`s education goals. Hence, it would be better to make an investment in FD or debt mutual funds. But that does not happen in the real world, people still invest in equity mutual funds for goals like these.
No one in the world can force you to take investment decisions. You can do whatever you want to do with your funds. But what if equity mutual funds fall by 40% in the next 3 years, what will you do then? There are high chances that you will lose patience. You will attempt to fill in the gap by withdrawing the entire amount from your retirement corpus.The reason – you have not defined your financial goals appropriately.
Trust me, if you sit down and start writing, defining your financial goals would not take more than 5 minutes.
Let us proceed and find out about the major financial goals of the person. (Preferences can vary from person to person but the major goals are almost identical.)
Personal Financial Goals List- Excel Download
Here’s an excel sheet which you can use to write and track your personal financial goals in an orderly format. Download now! It will not take more than 5 minutes to write down your financial goals!
Paying Off Debt
Now the question is – why paying off your debt should be the major financial goal? I’m not talking about long-term loans such as a home loan or car loan which are difficult to pay instantly. Here, I’m referring to high-interest loans which are making a dent in your personal financial goals. And, credit card due is one of them. Credit card interest rates are around 36-42% per annum. Believe me, there’s no financial instrument which I know of that can offer you returns up to 36-42% per annum. That’s the reason, I always say – beg, borrow or steal but pay off your credit card dues immediately.
We always take our income for granted. Nonetheless, you should never take your income for granted. The reason is that our expenses are granted. Again, before deciding on your financial goals, prepare a contingency fund. If you and your spouse both are working, go for a contingency fund of 6 months. If you are the sole earner in the family, create a contingency fund of 12 months. Plus, keep it in your savings/FD account and do not think of earning returns from it.
Child`s Education Goals
How much amount would you require for your child’s educational goals? After how many years do you want to provide for your child’s educational goals? I am talking about child’s higher education i.e. after he/she would pass 12th standard. The monthly expenses of your child till 12th need to be taken care of from your salary.
Child`s Marriage Goals
I am not at all in favor of providing any amount for the purpose of child`s marriage. However, there are people who have different opinions regarding the same. Most of the people I have interacted with want to contribute more towards their child`s marriage than education. If you are also in favor of providing for child`s marriage goals, then it’s your choice.
You can decide as to how much amount you want to contribute to your child’s marriage goal. Also, be sure about the number of years after which you want to provide for the same.
First of all, check your current expenses. I am talking about your monthly household and lifestyle expenses. This is the minimum amount which would be required at the time of retirement, of course, inflation-adjusted. But why am I considering the same amount? The reason is that cutting down on your household and lifestyle expenses is very difficult. Although you can increase the required amount, do not decrease it.
This is the most important goal you should have. We do not have any job security in India unless you are employed in the government sector.
So check, at what age do you want to retire from your job? What is your life expectancy? Do not take less than required life expectancy. In fact, take it on the higher side. What amount do you want to provide for your retired life as per today`s cost trends?
You may have some other goals such as:
- Purchasing a house after a period of 5-10 years.
- Going on a vacation every year and planning a budget for the same.
- Buying a new vehicle after 5 years with a total budget of around 10 Lakhs.
Once you have defined your financial goals, just ensure that the goals are met with or without your presence.
If you are not around in the case of an unfortunate event – Buy a life insurance cover for that.
If you are around but face financial difficulty due to some accident – Buy a personal accidental policy for the same.
Health Insurance – You will require health insurance throughout your life. Even a single instance of hospitalization can make a big dent in your corpus for other financial goals. Thus, you should buy one right away!
My point is that – whatever your goals are, make sure that you write them down. By doing so, you would have a clearer perspective of your finances.
Till Then, Happy Investing!