Setting short-term, midterm, and long-term financial goals is an important step toward becoming financially secure. If you aren’t working toward anything specific, you’re likely to spend more than you should. You’ll then come up short when you need money for unexpected bills, not to mention when you want to retire. You might get stuck in a vicious cycle of credit card debt and feel like you never have enough cash to get properly insured, leaving you more vulnerable than you need to be to handle some of life’s major risks.
Financial Goal planning refers to setting financial goals and developing plans to achieve them. Your financial goals can be short-term, medium-term, or long-term. Short-term goals can be achieved within a span of one to three years. Examples are building an emergency fund or investing for a vacation. The medium-term financial goals could be buying a car or an SUV.
The long-term financial goals usually take a longer span of 10-15 years or even more. Examples are planning for retirement, buying a home, or saving for your child’s education and marriage. You must always invest for your financial goals based on the time horizon and risk profile.
Financial goals such as children’s marriage, buying a house, or a car are high-value goals. You must plan and invest your money to achieve these goals over a longer period of time. Financial goal planning helps you decide where to put your money. You can select the best investments based on your risk appetite and stay on track to achieve your financial goals.
Financial goal planning helps you to get more organised with your money. For example, you would have to cut down on excessive spending to achieve a financial goal such as saving for your children’s higher education.
Annual financial planning gives you an opportunity to formally review your goals, update them, and review your progress since last year. If you’ve never set goals before, take the opportunity to formulate them so you can get or stay on firm financial footing. Here are goals, from near-term to distant, that financial experts recommend setting to help you learn to live comfortably within your means, reduce your money troubles, and save for retirement.
Short-Term Financial Goals
Setting short-term financial goals can give you the confidence boost and foundational knowledge you need to achieve larger goals that will take more time. These first steps are relatively easy to achieve. Though you can’t make $1 million appear in your retirement account right now, you can sit down and create a budget in a few hours, and many people may be able to save up a decent emergency fund in a year. Here are some key short-term financial goals that will start helping right away and get you on track to achieving longer-term goals.
Create an emergency fund
An emergency fund is money you set aside specifically to pay for unexpected expenses. To get started, Rs. 5000 to Rs. 10,000 is a good goal. When you meet that goal, you’ll want to expand it so that your emergency fund can cover greater financial difficulties, such as unemployment. If you didn’t have an emergency fund prior to the COVID-19 pandemic, you likely wished you did. And if you did have one, you may have tapped into it and need to replenish it.
Pay off credit cards
Experts disagree on whether to pay off credit card debt or create an emergency fund first. Some say that you should create an emergency fund even if you still have credit card debt because, without an emergency fund, any unexpected expense will send you further into credit card debt. Others say you should pay off credit card debt first because the interest is so costly that it makes achieving any other financial goal much more difficult. Pick the philosophy that makes the most sense to you, or do a little of both at the same time.
Mid-term financial goals
Typically, midterm goals take about five years to achieve. A little more expensive than an everyday goal, they are still achievable with discipline and hard work. Paying off a credit card balance, a loan or saving for a down payment on a car are all mid-term goals.
Long-term financial goals
This type of goal usually takes much more than 5 years to achieve. Some examples of long term goals are saving for a college education or a new home.
Buying a home is a common long-term financial goal. Whether you’re saving for a down payment or working to pay off a mortgage, homeownership is one of the largest financial targets to aim for.
Saving up a sizeable down payment is the best way to get a reasonable home loan. And if you save enough, you can avoid the cost of Private Mortgage Insurance, which will save you even more money.
Invest in a College Education
Unfortunately, due to the increasing cost of college, paying off student loans has become a modern long-term goal. Whether you’re a student paying off your own balance or a parent saving for your child’s education, college tuition is easily a substantial goal to base your budget on.
- Estimate your desired annual living expenses during retirement. The budget you created when you started on your short-term financial goals will give you an idea of how much you need. You may need to plan for higher healthcare costs in retirement.
- Subtract the income you will receive. Include Social Security, retirement plans, and pensions. This will leave you with the amount that needs to be funded by your investment portfolio.
- Estimate how much in retirement assets you need for your desired retirement date. Base this on what you currently have and are saving on an annual basis. An online retirement calculator can do the math for you. If 4% or less of this balance at the time of retirement covers the remaining amount of expenses that your combined Social Security and pensions do not cover, you are on track to retire.
Importance of Financial Planning
Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies. The importance can be outlined as:
- Adequate funds have to be ensured.
- Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.
- Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning.
- Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company.
- Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds.
- Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability an d profitability in concern.