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Setting Financial Goals The SMART Way!

Updated: Feb 22, 2022

When one reads the word ‘Financial Goals’ it sounds like a very complex financial jargon. Wherever there is complexity, most of the new investors are reluctant to get into it. However, the financial world is simple and if one connects the same to things they know, it is understood in a better way. So let’s try to understand - Financial Goals in a simpler manner.

Most of us know about the sport – Soccer or football. It is a simple game where two sides consisting of eleven players each play to score a goal in the opposition post. Just imagine players just playing with the football without having any goal post. Will that give any kind of excitement to players or viewers? Will you play such a game or even watch one? Similarly when you try to invest in mutual funds without setting a financial goal – it hardly has got any meaning. Simply put – when one invests with a target to achieve his set goals in life – it is termed as a financial goal.

The way a soccer team constantly thinks about three factors like when to score, how much to score in the given ninety minutes of play time. Similarly there are three important aspects to financial goals as well.

What constitutes a Financial Goal?

There are three important aspects as one needs to answer three questions here.

How much money do I need?

For what purpose do I need it? And most importantly,

When I need that money?

So answering three questions, how much? What Purpose? and in What time frame? – makes your financial goal. Even if a single factor is missing – it won’t be a financial goal. If one says – I require Rs 10 lakh, after five years for my daughter’s wedding is a financial goal. Here even if one factor had gone missing –it becomes vague.

Financial Goals Based on Time Frame

The goals could be short term; medium term and long terms depending upon the time frame and the size amount one needs to get. To give some examples – These sorts of financial goals will occur within a year and include things such as taking an international holiday, buying a new laptop or a two wheeler etc. Sometimes repaying smaller tenure loans or liabilities within a year also comes under short term financial goals.

As for the medium term financial goal, it can occur between timeframes of more than one year to five years. Buying a car, kids’ education till high school and buying a first home may fall under such categories. Long term goals have longer tenure and things like retirement planning, accumulating capital for business purposes and higher studies for children abroad are few of the examples. However as the time frame changes it also results in selecting a right tool for investing. So based on the time frame and risk appetite it depends whether one goes for Direct Equity, Mutual funds or even the other alternative asset classes.

Financial Goals should be - SMART

When we mentioned the word smart it means it should be Specific – Means specifically ascertain what you want. Even slightest deviation from specifics would result in delayed attainment of financial goals. Specifically mention – who, what, when, where which and most importantly why aspect of the financial goal.

M stands for – Measurable, means it can be measured in terms of monetary factors. Using words like significant amounts of money does not measure the actual requirement.

A stand for Achievable - This factor focuses on how important a goal is to you and what you can do to make it attainable or achievable. Taking care of factors like if one requires developing new skills and changing lifestyle or over spending behavior, falls under this parameter. This one is meant to inspire motivation, to keep one going in the right direction.

R stands for being Realistic. The end result of any financial goal depends on the kind of investment you make, the risk you take and eventually the time frame you keep. So if you have a smaller amount to invest, with lower risk and very small time frame – attaining a larger amount goal becomes impractical.

And last but not the least – T stands for Timely. As the saying goes, start early to get a major advantage of compounding factor. Longer the duration – better the wealth creation is. Suppose someone plans to attain a retirement goal when he is nearing his fifties – it would be difficult for him to build a right corpus. But if the similar thing starts from early twenties – the investment required would be lower and a right corpus can be created.

Defining the risk appetite and selecting a right Investment instrument

After bifurcation is done on the time frame, based on the risk appetite further bifurcation is required. Like for less than one year or short term financial goals – liquid schemes of mutual funds or normal risk free investments are also sufficient. As inflation hardly plays a role out there. However, when the time frame is for a longer period the challenge remains on beating the inflation first and then achieving your financial goal. Like a Car price usually increases over years, realty prices also may move further upwards till we achieve our medium term goals. And the more challenging one is retirement planning (a separate blog is needed for that). Not everyone is lucky to have benefits of pension or other way of income sources. Add to that the inflation factor the task becomes more daunting. Here the compounded annual growth rate (CAGR) comes in handy. Like equity investments generate a CAGR of 14 to 16 percent. Even the mutual funds generate a good CAGR between 10-12 percent over a longer period. Cycles may be deceiving in less than three years period – but when the goals are set for more than three years – risk mitigation occurs naturally. In nutshell, whether the financial goal is long term, medium or long term – understanding your own risk appetite and amount you can set aside now (invest now) on a regular basis – a right instrument can be selected.

Benefits of setting financial Goals

While a lot becomes easier when we are focused on goals here are few of the benefits of financial goals. First and the foremost is, it gives a purpose to your investments. Like we mentioned earlier – soccer players just passing the ball to each other without having a goal post to score is meaningless. Similarly investing without financial goals is meaningless. Secondly based on time frame and risk bearing capacity, one can select right investment products like Mutual funds (equity diversified mutual funds, balance funds, debt funds or liquid funds etc). Further investment discipline is developed as its regular process and hence commitment is necessary. Portfolio diversification also becomes easier as the investment plan is spread over a longer duration. This helps to mitigate the risk by a certain amount. Lastly, it results in financial independence. In the current uncertain scenario where technology is changing almost every day – financial independence is a necessary. By setting a right financial goal at the right time with suitable risk – financial independence can be achieved.


Conclusion: Investment without financial goals is meaningless. Set your short term, medium term and long term financial goals – earlier the better.

Pro Tip: Your dreams are going to cost you more in future. So selecting a right investment vehicle as per suitable risk and timeframe with ability to beat the inflation is a necessity. Set your financial goals early and attain financial independence.

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