Do you want to be among those who neglect Long Term Financial Goals and regret later? If not, you are in the right place at the right time. This article would give you the exact step by step information that you require for achieving your long term financial goals.
Setting Your Long Term Financial Goals:
It’s fair to understand what exactly Long Term Financial Goals are and why you should bother about them before going any further.
What Are Long Term Financial Goals?
You know all about goals. A goal is something you want to achieve. You also know that A Goal Should be SMART i.e. Specific, Measurable, Attainable, Realistic and Time-bound. So any goal which requires money to be exchanged is a Financial Goal.
How much time is on your hand to achieve that goal (the time-bound attribute of a SMART Goal) determines whether it’s a short-term, medium-term, or long-term goal. There is no Oxford approved definition of a long term goal like any goal which has 10 years on hand is termed as a long term goal. People figure out based on their own perceptions. We would consider 5 years and above as long term as 5 years is quite far, especially in this fast and instantaneous day and age.
Why You Should Bother About Long Term Financial Goals?
As mentioned above, the ill-effects of not planning for long-term finances can’t be felt anytime soon, unless that time has arrived. This is the primary reason why you should start planning for long term financial goals.
Apart from this, long term financial goals do what entering a destination does in the GPS navigation system. Long term financial goals would act as a guiding light to the majority of your day to day financial decisions. They would bring about the much-required focus into your money management.
List Down All Your Major Long Term Financial Goals:
Noting down all that you want to achieve in life is a good starting point for getting the ball rolling. Your child’s higher education at a reputable university, family world tour, buying that dream home or car, following your favorite cricket team wherever they travel and the list goes on.
Don’t worry about how you are going to achieve these goals, just note them down for two good reasons. First, you have to think about something before it can materialize in reality. If you don’t think, you are not going to achieve it. The other reason is that this list of goals would give you the inspiration to keep going even when things are not going well.
Differentiate or Categorize The Listed Long Term Financial Goals:
Now that you have a list of all the long term financial goals you want to achieve in life, I want you to differentiate and categorize each of them in any of the following:
Must Haves: This category includes the financial goals that can’t be compromised, come what may.
Nice To Have: There are certain financial goals which you would like to achieve. However, even if you don’t achieve them, it won’t matter as such. This kind of discretionary financial goals would fall under this category.
Love To Have: Going further, those financial goals that fall at the high end of the aspirational goals are termed ‘Love To have’ goals.
The next step would throw more light on these financial goals in terms of their validation and prioritization.
Validate And Prioritize The Long Term Financial Goals:
After the categorization, it’s time to validate and prioritize your long-term financial goals. Not the external validation but validation from within you. Your principles and values in life along with what you love and are passionate about.
Pick The Top Goals To Pursue:
It’s time to pick and choose the top long-term financial goals to pursue based on categorization, validation, and prioritization you have done. To make things simpler, it’s fair to start with 3 to max 5 goals.
Quantifying The Long Term Financial Goals:
Once you know what are the goals you are pursuing, remember these are financial goals. Finance is a number game and therefore it’s logical to convert these financial goals into numbers. These next few steps are discussed keeping in mind a single goal. You can repeat the same for multiple goals.
Research The Current Cost Of Achieving The Financial Goal:
Estimating the cost of a long term financial goal at a future date is a difficult task. Hence you should spare enough time to research as if you have achieved the goal today itself. This research will give you some numbers in terms of the current cost of that goal. This number is a good starting point to move ahead in the goal quantification process.
Goal Achievement Year:
At what point in time in the future you want to achieve this goal along with its current cost would help you know the future cost of achieving this goal.
Estimate The Future Cost Of The Financial Goal:
Before we go ahead to estimate the future cost of the financial goal, here is something I want you to consider. When I started my career in the year 2003, 1-liter petrol used to be Rs. 30. Nowadays it costs Rs. 85. The cost has almost tripled, a whopping 283% increase. In other words, the price of petrol increased by 6.31% per annum between the year 2003 and 2021.
This general rise in the cost of goods and services is called inflation. While estimating the future cost of your financial goal, you need to give due consideration to this invisible monster called inflation. If not, you might end up with little money to fulfill your goal at the designated time.
While is there is no scientific way of predicting future inflation, you can always revert to history and research congruent with your financial goal. It would a calculated guess, an estimate. Once you have the current cost, the number of years to goal, and an estimated inflation number, you can use the ‘Future Value’ function in excel to calculate the future value i.e. future cost of the financial goal.
Assumption The Expected Rate Of Return:
While estimating the future cost of the financial goal we have had an assumption about inflation. Here we would be making an assumption about the returns we are going to earn on our investment.
Again there is no concrete rule about how to decide the expected rate of return. The next step that is formulating the strategy to achieve the long-term financial goal would act as a guide when it comes to assuming the expected rate of return. The asset classes you are going to invest in along with respective exposure, the alignment strategy, and its frequency, all play a vital role in determining the returns.
Any Existing Investment:
If you are already investing for or a particular financial goal, then in this step you need to take into account the amount already invested and the expected rate of return on this investment. It would help in estimating the additional contribution that you need need to make.
Find Out The Contribution Needed To Achieve The Goal:
Once you have the current cost of achieving your financial goal, the assumed inflation rate, and the expected rate of return on your investment along with your existing investment, you can find out the contribution that you need to make using an excel sheet and financial functions (PMT function for a monthly contribution, PV function for one-time contribution).
If you are not comfortable using Excel, you can search online. There are many calculators available online which can help you find out the contribution you need to make and at what frequency. There are various applications on both Android as well as iOS platforms that can help you.
I have made a simple excel sheet for this specific purpose. You can get in touch with me by commenting on the post and I will be happy to share it with you.
Formulating A Strategy:
Once you have done research on the cost of achieving the long term financial goal and worked out a few numbers, the next step is to have a strategy and plan in place to achieve the long term financial goal.
Strategy and arriving at the final numbers go hand in hand. Meaning having a strategy in place would help you estimate the expected returns from it and if you have decided on the expected return from your investment, then you need to formulate a strategy which would help you achieve those number.
Below are important points to ponder upon in strategy formulation:
Understanding The Basics of Asset Classes and Investment Risks:
This is the bare minimum you need to know and understand if you are to achieve any long term financial goals or have any investing success in your life. Believe me, it’s not rocket science. Very simple and easy to figure out. 5 asset classes and about 7 investment risks. If you understand them well, you can decipher any investment product within minutes and figure out if it’s the right fit for you or not.
Decide Your Resource Allocation:
Once you know the numbers and understand the asset classes along with their pros and cons, it’s time to allocate your money among those asset classes. Across how many asset classes you want to spread your investment and in what proportion represent the resource allocation. Remember, your decision here hugely impacts the expected rate of return and if you already have decided the expected rate of return, then the resource allocation should be in congruence with it.
Fixed Or Dynamic Resouce Allocation:
Having in-depth clarity about your allocation strategy right at the beginning would ease out future decision making. The resource allocation you decided at the previous stage is the initial resource allocation. Do you want to maintain the same exposure throughout or would you want to change the exposure to various asset classes depending upon the market conditions and various other factors? This is called opting for a fixed or dynamic resource allocation.
You buy a new car and use it for a few months for a few thousand kilometers. After a certain number of kilometers, the wheels of the car need to be aligned. The car manual itself clearly states e.g., every 5,000 km, you are required to have wheel alignment.
Similarly, once your investment journey starts and different asset classes start earning returns, it causes an imbalance in the resource allocation you opted for. You need to align the exposure to various asset classes to the original or desired level. You can choose to align your portfolio once a year, twice a year, or even never depending on your strategy, decide it now to avoid confusion in the future.
Lots of people ask if this or that investment product is good or right to invest in without reflecting enough on their financial goals and strategy. It’s only after setting goals and laying down a clear cut strategy, you need to start looking for products that are the right fit for you.
The Exit Plan:
Again, it is important to decide on a crystal clear exit plan, a year or 2 in advance of the goal attainment date. This will reduce the impact of market or volatility risk and give you enough time to take any corrective measures if needed.
Always overestimate the inflation rate and underestimate the expected rate of return for having more is better than falling short.
Let me explain. If you overestimate the inflation rate, the estimated future cost of the goal would be higher. Hence your target would be higher and you would be making higher contributions. If the inflation rate is less than the assumed, you would achieve your goal faster or end up with a higher corpus.
Similarly, when you underestimate the expected return, the contribution you need to make would be higher. If you get more than the expected returns, you would end up having a higher corpus or achieve your goal before time.
Both the above scenarios are good than estimating a lower inflation rate or higher expected returns and ending up with a lower corpus or taking more time to reach the desired corpus.
Prepare ‘Plan B’:
Thus far you have thoroughly planned your roadmap keeping in mind everything goes well as far as income and investments are concerned. Now I want you to think about what could go wrong or what could prevent you from achieving the long term financial goal and be ready with a backup plan to deal with such scenarios.
As long as you are there earning enough money, the plan and strategy that you have in place would make sure that you are going to achieve your long term financial goals. The problem is under any of the two circumstances.
You are no longer there: If for some reason, you are not there, the income and in turn, the contribution would stop. This would leave the goal attainment in jeopardy.
You can’t Work: Due to circumstances beyond your control, if you can’t work, again there would be a full stop to income and the contribution and hence there would be uncertainty about goal achievement.
I have listed two of the most common incidences which could prevent you from achieving your goal. You can have a long hard look at other probable reasons peculiar to your own life.
Once you have thought of all the probable reasons, a solution can be worked out to overcome them. Below are solutions to the above-listed problems.
Term Life Insurance: To overcome a situation where you are no longer there to contribute to the goal achievement and the goal is vital to your family’s overall well-being, a term life insurance can compensate for your earning. This way you can ensure the goal achievement even if you are not there and make sure your family is reaping the rewards of the financial goal you sow.
Health & Personal Accident Insurance: The only way you would stop earning is if your earning capacity is hindered. To compensate for such scenarios there are few covers available under health and personal accident insurance which would compensate you in case of loss of your earning capacity or diagnosis of a critical illness. Further, they would also protect your savings and investments by compensating you in case of any hospitalization expenses.
This contingency and protection planning is based on the philosophy of ‘Hope For The Best And Be Prepared For The Worst’. It’s like a batsman going to bat to score runs, fully prepared with all the protective gear. You know that every batsman’s intention is to hit every ball with a bat so that he can score maximum runs. Still, he doesn’t go out to bat with wearing those protective gears. Similarly, you also need protective gear in the form of insurance to protect you and your family against the uncontrollable of life.
Any idea or plan or strategy is worthless unless acted upon. It’s time to act promptly because money loves speed, hence implementation is key.
Don’t Feel Overwhelmed:
I know it’s easy to feel overwhelmed by looking at all these numbers. However, if you are lost in this overwhelming state, you would never achieve your financial goals. Instead of looking at the entire roadmap, focus on the next step only.
Start With Whatever Resources You Have Right Now:
‘Something Is Better Than Nothing’, remember this line and take the first step with whatever you have now, doesn’t matter how tiny or insignificant it seems. If you wait for accumulating enough and then starting the journey, believe me, you will get stuck for a long time.
That Perfect Time Never Comes:
If you would for that perfect time to start investing for your long term financial goals, think again. ‘The Perfect Time’ phenomenon is just an illusion, like a ‘Mirage’. Would you want to chase such a phenomenon or get on the act now? Decide for yourself.
Any Delay Is Making Your Task Harder:
You have 30 minutes to cover 2 kilometers, walking. What if you waste the first 10 minutes by not starting the walk? You will have to walk faster to reach the goal on time, right?
The same is true for your goal achievement. Every delay is making your goal achievement harder either in the form of higher contribution or pursuit to achieve a higher return. What would you prefer, an easier task or the hard one? It’s up to you.
Increase The Contribution Along The Way:
If you have started with less than the required contribution, you have no choice but to increase your contribution along the way in order to reach the goal within the stipulated time. And even if you have started with the required contribution, it’s beneficial to increase the contribution as it will help you reach your financial goals before the timeline. Below are a few pointers that can help you increase the contribution along the way:
Raise your contribution with raise in your income
Look to increase your income by leveraging other resources available to you
Cut the unnecessary and avoidable expenses to increase your surplus money.
Track, Review, and Refine:
Achieving your long-term financial goals is not a ‘fill it, shut it, and forget it’ kind of activity. It’s a continuous process and like any other ongoing process, it involves tracking, reviewing, and refining.
Tracking refers to the general direction in which you are heading. So, make sure you are on the right track.
Reviewing is in line with what you have decided strategically, like the resource allocation.
Refining is aligning as per your strategy and sometimes even reconsidering the set strategy if it’s not yielding the desired results.
‘Be Fixed On Your Goals and Flexible On The Ways To Achieve Them’ would be the mantra to follow here. Keep plucking the gap, fine-tuning tactics and strategies till you succeed without losing sight of your long term financial goals.
“People don’t plan to fail, it’s just that they fail to plan.” If you plan your long term financial goals, you will achieve them. However, if you don’t plan, you are bound to fail. With these simplified steps, you are just an implementation away from your long term financial goals.
Let me know how useful this post is in the comments section. Further, be generous enough to share this information with someone who could benefit from it.
To Your Financial Well Being,