5 easy steps to demystify your financial goal

In Lewis Carroll’s Alice in Wonderland, the Cheshire Cat tells Alice “If you are not sure where you want to go, it does not matter which road you take”. That, in a nutshell, sums up financial planning. It is about setting your financial goals and then making a plan to achieve these goals. When done the right way, it makes you financially fit – i.e. capable of meeting life’s challenges and also able to enjoy the fruits of your hard work, in a way that is safe, sure and swift.

It just takes 5 simple steps.

1. Dream and put a number to it

A goal is a dream with a number attached. Saying you want to retire at 50 may be your dream. It becomes a goal, when you calculate how much money in the bank you need to have to be able to do so. Among other things, you need to consider what other major goals will take away your money, how much inflation will chip away at it, and how much money do you need month on month, for the next 30 or 40 years. It may be Rs 2 crore or 10, – but having that number in front of you tells you what you need to get there.

2. Cut down on high cost debt

Taking loans is giving away your whole tree when you want just 3 fruits today. If you are paying 35% interest on your credit card and 22% on personal loans, you are not going to get anywhere close to your goals. Repaying a 22% loan is like earning 22% on your investment. Think of any investment that gives you assured return of 22%? Any fitness plan cuts out the bad consumption, and your money’s fitness plan is no different. Cutting your addiction for plastic is where your financial fitness gets real.

3. Create an emergency fund

Education taught us that uncertainty is everywhere. The pandemic brought it right to your doorstep. You cannot prevent exigencies, but you can plan for them. How to create an emergency fund? Set aside 6-12 months of your monthly income as an emergency fund. Let it be invested in liquid deposits or liquid funds that can be accessed easily. Your emergency fund provides you with the safety net to invest freely with the rest of your money. You can afford lower returns in your emergency fund, but not losing capital. If your emergency fund is used up, replenish it first.

4. Get adequate insurance to cover significant risks

We generally understand insurance as a cover for life and health. But insurance is actually a lot more. A large unfortunate like event can wipe out your savings, leaving you and your family exposed. Of course, the first insurance you must have is a term cover for your life, so your loved ones’ needs are covered for even in the worst case. Ensure that all members of your family have health Insurance. Next, Ensure that your valuable assets are insured. Above all, liabilities like home loan, car  loan, personal loan etc. should be insured. You don’t want your family to lose your home because the EMI becomes a burden.

5. Now invest in SIPs to meet your goals

When you plan for financial goals, there are two things to remember. Firstly, use systematic investment plans (SIPs) to plan for medium term and long term goals. Peg each SIP to a specific goal, so you don’t end up like Alice in Wonderland.

But how much should you save? Work backwards from your goals – and then follow the principle – save first spend later. Focus on spending on your needs, but cutting down on the wants. Don’t wait till you have enough funds to start saving. It never happens. A Rs 20,000 monthly SIP in equity funds earning 14% annualized over 25 years grows to Rs 5.50 crore. To reach your financial goals make money work harder.

You can easily make life financially fit, if you combine an early start with discipline and careful monitoring. Financial fitness is not just about investing. Keep in mind the foundations of debt repayment, liquidity and insurance and you are ready to realize the life of your dreams!