From owning a farmhouse and a luxury car to travelling the entire world, there are several aspirations in life that you may want to achieve. However, often, you may stop yourself from wanting such things as you assume these ideas to be far-fetched. The fact is most of these dreams are achievable if you turn them into financial goals and prepare a financial plan to attain them. Discussed here are ways to carry out financial goal setting and a step-by-step approach to achieve those money goals.

1.      Build a contingency fund before investing

Contingency funds assist in facing financial emergencies like income loss or severe illness. Before starting your investment for your financial goals, make sure to build a contingency fund big enough to cover your living expenses of around six months. Forming a sufficient contingency fund will save you from selling off your investments earmarked for attaining your money goals to face financial emergencies. Also, make sure to increase the size of your contingency fund to account for inflation.

2.      Figure out your financial goals

Financial goals are monetary targets to achieve your short-term and long-term financial goals. Short-term ones are your immediate goals having a time horizon of up to three years while long-term ones are big picture costs that take five years and above to reach the goal. Examples of short-term financial goals may include corpus accumulation for your emergency fund, a trip abroad, purchase of big-ticket commodities, etc., while long-term financial goals include corpus accumulation for your retirement, child’s higher education or wedding, etc.

Identify both your short-term financial goals and long-term financial goals. Once done, prioritise your goals. Note that prioritization of goals may vary from one individual to another depending upon their marital status, age, monthly investible surplus, etc. For instance, personal finance goals of forming a corpus for wedding, purchasing a dream car, etc., may be more relevant to young-aged individuals while those in their late 30s, forming a corpus for their retirement corpus, child’s education, etc., would be of higher priority.

3.      Calculate the monthly contributions for attaining your goals

Once you have figured out your financial goal, you must calculate the monthly contribution required to attain them. Begin by computing the future value of your goal by factoring in the rate of inflation. Use the online SIP (Systematic Investment Plan) calculator to know the monthly contributions required to attain these personal finance goals by assuming a conservative return rate for the chosen asset class. Getting this monthly contribution figure for attaining your financial goals will assist you to budget your expenses and invest accordingly.

4.      Assess your risk tolerance level

This step involves self-evaluation of your potential to take risks. As different investment options have different levels of risks, you must factor in your income stability, liquidity, and investment horizon of different financial goals to determine your risk tolerance level. Knowing your risk tolerance level will help you decide on your investment instrument. For instance, if you are willing to take a higher degree of risk, you may invest a higher portion of your long-term investments in equity funds. Likewise, if you are witnessing income uncertainties, you may set aside a higher portion of your long-term investments in debt funds or other fixed income instruments. Awareness about your risk tolerance level will even assist you in deciding your asset allocation strategy.

Ideally, it is recommended to invest your long-term financial goals of five years and above in equity funds because equity has the potential to generate higher returns by a wider margin over the long term. For short-term financial goals of up to three years, it is prudent if you opt for investments that offer capital protection such as short-term debt funds.

5.      Assess your financial plan periodically

Financial planning is nothing but a continuous process, which requires constant monitoring. Regular review of your financial plan allows you to make the required adjustments as per changes in your lifestyle, income, monthly investible surplus, etc. Also, remember to review your investments’ performance at regular intervals, particularly in the case of stocks and mutual funds.

Note that high-performing mutual funds and stocks of the past can become underperformers for a long period. Hence, make sure to compare the performance of your investments such as mutual funds with its peer funds and benchmark indices every three months. Liquidate the funds if they constantly underperform its benchmark indices and peer funds over the past three years.

Ending note

Whether your financial goals for 2023 are purchasing your dream home with a yard, preparing a corpus for a vacation abroad, or putting a brake on your habit of splurging – to accomplish these aspirations, you must chalk out a strategic financial plan. Only then can you effectively meet these financial goals in the desired timeline.