This article explains in detail – the list, types and example of personal financial goals. Before going further, let us see what a personal financial goal is?
What is a Personal Financial Goal?
Personal financial goal is the target amount of money required for specific future financial needs. It differs between person to person. A youngster may have a personal financial goal of buying a house in 10 years while a middle-aged person may be investing for an early retirement. As no individual is same, personal financial goals also vary according to your income, spending and saving habits.
Types of Financial Goals – Three Different Types
Normally, there are three different types of financial goals
Short Term Financial Goals
Financial goals which you want to achieve in next 1-5 years are defined as short term financial goals.
Intermediate Financial Goals
Any financial goal, which you want to achieve in between 5-10 years are intermediate financial goals.
Long Term Financial Goals
The financial goals which are more than 10 years away are termed as long-term financial goals. Though I personally consider long term goals as 15 Years away,
Personal Financial Goals List
Though list of financial goals varies from person to person. Here is list of personal financial goals which you can refer to
- Clearing Credit Card Debt – 6 Months
- Creating Emergency Fund – 1 Year – Short Term
- Buying Vehicle – 2 Years- 5 Lakhs –
- Going on Vacation – Recurring 2 Years – 2 Lakhs
- Buying a House – 7 Years – 80 Lakhs – Intermediate Term
- Child 1 Graduation – 14 Years – 10 Lakhs – Long Term
- Post-Graduation – Child 1– 18 Years – 20 Lakhs
- Child 2 Graduation – 17 Years – 10 Lakhs
- Post Graduation-Child 2 – 21 Years – 20 Lakhs
- Child 1 Marriage – 24 Years – 10 Lakhs
- Child 2 Marriage – 26 Years – 10 Lakhs
- Financial Freedom -15 Years – 3 Crores
- Retirement – 25 Years – 7 Crores
*You can suggest if any thing need to be added in personal finance
Financial Goals Examples
Suppose, you have 3 personal financial goals as given below:
- Higher education of your son
- Marriage of son
Suppose, you want to provide Rs. 10 Lakhs for higher education in today’s cost for your 3-yr-old son. The child requires the money for higher education, when he is aged 17. Assuming 8% inflation, the value of Rs. 10 Lakhs will be around Rs. 29 Lakhs after 14 years. How he can plan for this goal?
SIPs are better for long-term wealth creation but rebalancing is required
You can start SIP of Rs. 8,000 to reach this goal. An investment of Rs. 8,000 per month for the next 14 years can create Rs. 29 Lakhs, assuming a 10% CAGR return. But will the market offer a liner return of 10% every year? No, the equity market will be volatile. During these 14 years, there can be years of very high returns, moderate returns and negative returns. But we have assumed an average return of 10% for our calculation. In this case, you should do rebalancing of the portfolio.
For example, you can start with the entire Rs. 8,000 in Equity fund, but you should gradually reduce the Equity component and increase the Debt component as you are nearing the goal. After the first 5 years, you can have Rs. 6,000 in Equity and Rs. 2,000 in Debt funds and reduce the Equity gradually. After 10 years, you can have Rs. 2,000 in Equity and Rs. 6,000 in Debt. In the last 3 years, the entire SIP can be in Debt. You should also rebalance the accumulated amount in the same style. This rebalancing will ensure that you are getting a soft landing when you are reaching the goals.
You can have separate SIPs for child marriage and retirement, the same way.
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How do you set financial goals and achieve them?
As mentioned above, you can set your financial goals. You can achieve your financial goals as per risk taking ability. Let us see how
Plan your investments as per your risk-taking ability
You may have heard of many investors making huge money through Equity investments. But, if you are not aware of Equity investments, you will not venture into it. You will prefer to go with the asset class where you are comfortable to achieve your personal financial goals.
Mix of Equity and Debt for reaching your personal financial goals
Even though Debt investments are stable, they offer low returns. It will be difficult to reach your personal financial goals only through investing in Debt products. It makes sense to go through Equity for the long- term goals. But, if you are not an expert in investing in shares, you can go through the Mutual Fund route. Here, you are investing in Equity through a professional Fund Manager. Also,your risk is limited and diversification reduces the risk further.
SIPs are better options to invest in Equities
Systematic Investment Plans (SIPs) are better for investing in Mutual Funds. In SIP, you are committing a fixed amount towards investing every month, irrespective of the market conditions. If you are opting for Rs. 5,000 SIP on the 5th of every month, this amount will be invested by the Fund Manager in a basket of shares as per the mandate of the Fund. SIPs are better for investors because it will bring the discipline in investing. The other advantage of SIP is the rupee cost averaging. Your investment will buy more units when the markets are lower and buy fewer units when the markets are high. This will help you in averaging out the cost of units in the long term. SIPs have given handsome returns in the long term. Good funds have given CAGR of 15% in the past 10 years.
Your returns will be more when your money is in Equities and it will be less when it is in Debt. But Equity will be volatile, while the Debt return will be steady. By rebalancing in this way, you are protecting your accumulation from any last minute volatility nearer to your goals.
Should I take separate SIPs for different personal finance goals? Though Many investors are faced with this question regarding investing, it entirely depends upon you.
Separate SIP for different personal finance goals – for better monitoring
If you have separate SIPs for different goals, it will be easy for you to do the rebalancing. If you are having common SIPs, it will be difficult to rebalance, because different goals will have different duration.
In the example, you can have one SIP for higher education, another one for marriage and a third one for your retirement. Also,having separate SIPs for different personal finance goals will make monitoring easy.
So, what are your views on “personal financial goals” ? Also if you liked the article, please share it with your friends and Family.