What is Financial Planning?

Table of Content

1. Types of Financial Goals

2. How to Set Financial Goals That You Can Achieve

3. Common Mistakes and Myths About Financial Goals

4. How to Track, Review, and Adjust Your Financial Goals Over Time

5. Conclusion

6. FAQs about What are Financial Goals

Types of Financial Goals

In order to execute goal-based financial planning successfully, you must understand the different types of financial goals:

Short-term Financial Goals

Short-term financial goals are essential aspects of personal finance that you aim to achieve within a year. These may include creating emergency fund goals, paying off minor debts, or having savings goals for a small purchase like a new gadget. These goals are usually personal financial goals that require minimal commitment but offer quick rewards. They also help build a financial discipline in the person pursuing them over time.

Medium-term Financial Goals

Medium-term financial goal setting, which involves setting financial goals for a period of 1 to 5 years, is a crucial aspect of financial planning. Examples include saving for a down payment on a house, purchasing a car, or funding a major family event. These goals require a structured savings plan and a mix of short-term investment and low-risk options to ensure steady progress

Long-term Financial Goals

Long-term financial goals, such as planning for retirement, debt reduction goals, children's education, or building substantial wealth, are those that take more than five years to accomplish and are important aspects of financial planning and wealth management. Achieving these requires consistent efforts and a long-term investment plan that balances risk and growth for maximum returns.

Financial Goals Examples

In order to better understand the financial goals meaning, here are some examples that elaborate upon different types of financial goals:

Retirement Fund:

Retirement planning goals are one of the most common long-term goals. Once you have built yourself a retirement fund it gives you the satisfaction of financial independence and comfort in your golden years. Allocating money for retirement-specific investment plans helps grow your savings steadily while offering tax benefits and security.

Home Purchase Goal:

Buying a home is a major life milestone. The setting of financial goals for building or purchasing a home involves several aspects. Some of these could be having a plan to save for a down payment or budgeting for subsequent monthly instalments. It may also involve considering construction-related expenses or those required for maintenance. This goal often requires a mix of savings and investments for success.

Vacation:

Many people save to cater to a dream vacation. It is in fact one of the most popular short term financial goals that many people relate to. It not only encourages one to develop financial discipline but also lends them the motivation to cut down on unnecessary expenses. Budgeting for travel, accommodation, and other costs ensures a stress-free holiday without financial strain.

Education:

Whether for your education or your children’s, saving for education is crucial. This goal may span both medium and long-term horizons. Education goals are often also considered income goals if they are aimed at eventually boosting your overall income. These are smart financial investments that can ease future financial burdens, making them a vital part of any financial plan.

How to Set Financial Goals That You Can Achieve

Financial goals refer to the personal objectives you set for how you would like to save and spend your finances. Here is a step-by-step guide on how to set these goals: 

1. Assess Your Current Finances 

Having an understanding of your current income, expenses, liabilities, and savings allows you to set practical financial goals instead of utopian ones. It confirms that the goals you are setting will become a reality one day. 

If you find it difficult to assess your current finances or your savings, there are plenty of online tools available that assist you in doing so. For example, use HDFC Life’s financial tools & premium calculators to learn how much tax you are saving from your insurance policies, HRA tax liabilities, SIPs’ future values and so on. 

2. Define Priorities 

Distinguishing your financial goals into short-term, medium-term, and long-term priorities not only helps you gain clarity but also ensures better financial management. For example, suppose you are a single IT professional planning to switch jobs. During this period, first consider your short-term goal, which is how you plan to cover your essential expenses while looking for a job. Then, consider your medium priority goals, such as buying a car. After that, you can consider long-term goals such as having a family or your children’s education. 

Prioritising financial goals not only allows you to remain stress-free but also to reach those goals one after another with ease. 

3. Apply the SMART Goal Method 

A SMART (Specific, Measurable, Achievable, Relevant and Time-bound) goal has a higher likelihood of success. For example, you plan a vacation to Kenya in the next two years. Firstly, you need an itinerary based on your budget, gather information regarding additional expenses and determine a tentative expenditure. Based on your findings, you need to decide how much savings you need and what the ways are to reach that particular financial goal. 

It might seem like a difficult task in the beginning, but with the right kind of attitude and disciplined savings, you can reach your goal.   

4. Prioritise and Allocate Funds

Follow the budgeting thumb rule of 50/30/20, as it will assist in prioritising and allocating funds properly. As per this rule, you need to spend 50% of your income on essentials such as paying home rent, maintaining an emergency fund, utility bills, food, transportation, and so on. Then, you can spend 30% of your income on luxuries such as shopping, buying an expensive watch, etc. Finally, you need to invest 20% of your income every month to ensure your financial security in the long run. 

While budgeting, prioritise emergency funds and debt repayment since most of the financial challenges occur due to these two factors. 

5. Budgeting and Tracking

Maintaining a budget and tracking regular expenses helps you to stay on track. However, that does not mean there will not be any impulsive purchases. Having room for flexibility is another crucial factor since it makes the whole budgeting exercise fun and not something that binds you to a strict schedule. 

Maintain a spreadsheet to track your expenses, and mention the slip-ups too. That way, you can get an idea of how more time you require to fulfil a specific financial goal.

6. Stay Flexible and Review Periodically 

Review your goals regularly and adjust plans accordingly. For example, all of a sudden, you got the opportunity to buy your dream car. Since this was not on your budget, you might feel conflicted. However, if you are flexible with your financial planning, you will be able to buy that car and readjust your future long-term goals. Having flexibility is important because it allows for improvisation and makes financial planning more practical.

Common Mistakes and Myths About Financial Goals

Now that you know what is financial goal and how to set these goals, let us look at some of the most common mistakes and myths: 

1. No Clear Timeline

Not having a clear timeline could make it difficult for you to track your progress, and you might find yourself in an endless loop of insecurity and confusion. Achieving a financial goal does not have to be difficult; it only needs to align with your current financial status. So, have a clear timeline to make achieving goals smooth and not a strenuous trek in the mountains. 

2. Ignoring Inflation

Inflation often erodes the purchasing power of money, reducing the actual value of savings over time. For example, you might think that saving ₹30,000 is good enough to cover your monthly expenses in 20 years. 

After 20 years, you realise that the amount is not sufficient since the living costs in the region you live in have grown higher thanks to inflation. Therefore, considering the impact of inflation while setting long-term financial goals is crucial. 

3. Setting Too Many Goals

Setting too many financial goals at one time runs the risk of spreading resources too thin. This could lead to failure because the distribution of resources is inaccurate. 

To eliminate this, prioritise a single goal for better focus and ensure success. For example, if you are planning to buy a house in an urban locality in the coming five years, devote all your investment planning and savings towards that goal. This will ensure that you have sufficient wealth accumulation in five years to buy that property.

4.  Overlooking Emergency Funds

Whether you have a secure job or not, overlooking emergency funds could be a disaster in your financial planning. Emergency funds serve as a safety cushion; their liquidity helps in handling any kind of trouble that might occur in the future. 

You can build an emergency fund simply by putting aside a certain amount from your regular income in its liquid form. Lacking an emergency fund can disrupt financial goals, as it's like driving a car without a seatbelt. 

5. Neglecting Regular Reviews

Financial goals require periodic reviews and adjustments. No matter if you think that last year you spent more than you earned. Accepting such negative reviews also helps in refuelling your financial planning. Revisit your financial goals regularly to stay aligned with your wealth strategy, and discover new ways to protect your finances against the volatility of the economy. 

How to Track, Review, and Adjust Your Financial Goals Over Time

Financial advisors recommend reviewing your financial progress at least once or twice a year to assess your progress. It is essential to understand the shortfalls and whether there have been any significant changes in your income or expense patterns. You can do that same after a life-altering event as well, such as marriage, a job change, having a baby and so on.

This analysis will enable you to fulfil your financial goals more conveniently from time to time. The best ways to keep track are by creating an Excel sheet with details of expenses, using online financial expense trackers or tools, and consulting finance advisors familiar with your financial history.

In case you find that there have been some random slip-ups in expenses, acknowledge them before making adjustments. Being flexible in such scenarios shows maturity, not failure. 

Conclusion

Financial goals are money management goals that lay down the foundation on which your financial plan stands. Factors affecting financial planning, such as income level, age, risk tolerance, family responsibilities, and economic conditions, play a crucial role in shaping these goals. These goals help you remain motivated and organized for the future while being prepared in advance. The primary objective of financial planning is to set clear financial objectives, whether short, medium, or long-term, with a strategic action plan. By aligning these goals with regular monitoring and follow-ups, you can achieve financial success and long-term security.

FAQs about What are Financial Goals

Q. What are examples of financial goals?

Examples of financial goals include saving for an emergency fund, paying off debt, investing for retirement, buying a home, funding education, and planning for a vacation. These goals can be short, medium, or long-term, depending on your timeline. Setting and achieving these goals highlights the many advantages of financial planning, such as reducing stress, increasing financial security, and achieving your dreams.

Q. Which investing strategy is the best?

The best investing strategy depends on your financial goals, risk tolerance, and time horizon. Diversifying across investment plans like stocks, bonds, and mutual funds helps reduce risk. A balanced approach often yields better long-term results for your financial wellbeing.

Q. What is meant by financial goal?

A financial goal is a money and finances-related target basis which you take your financial decisions. When you have clarity on your financial goals, you can allocate your resources effectively. This also forms the basis for managing your spendings as well. Financial goals allow you to invest wisely and move towards financial stability and long-term success.

Q. Why is it important to understand the meaning of financial goals?

It is important to understand financial goals meaning to get clarity and direction, so that you can create a focused financial plan. It ensures that your savings, spending, and investments remain well aligned with your priorities and makes it easier to achieve financial security and peace of mind.

Q. What are the three types of financial goals?

The three different types of financial goals include

• Short-term goals — focusing on immediate needs
• Medium-term goals — focusing on intermediate objectives
• Long-term goals — focusing on planning for the future

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