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Business News/ Money / Personal-finance/  5 mistakes you should avoid when setting financial goals

5 mistakes you should avoid when setting financial goals

One of the biggest errors in financial planning is not seeing your goals as linked to your overall finances, namely, income, savings, investments and the other goals you may have

Small errors you make when setting financial goals can make a lot of difference at the end. Photo: iStockPremium
Small errors you make when setting financial goals can make a lot of difference at the end. Photo: iStock

Setting goals is just the first step in the disciplined journey that will secure your financial future. If you don’t want to leave anything to chance where your security is considered, then you need to be aware of the big and small errors and oversights that can trip you up. Here are five mistakes you should avoid when setting goals to give yourself the best chance.

Seeing financial goals in isolation

One of the biggest errors in financial planning is not seeing your goals as linked to your overall finances, namely, income, savings, investments and the other goals you may have. Your goals should be an essential factor in all the financial decisions that you make. For example, the success of your retirement goal is linked to how well you are able to budget and save from your current income to invest for the future.

Each goal should also be seen in conjunction with other goals that you may have. Prioritising the goals so that the focus is on those that are important to your financial situation will stand you in good stead.

If building an emergency fund to cover six months of income and emergencies is a goal, then you may have to cut back on other closer-term goals so that your savings can be better used to meet the more important target.

The goals you set must be feasible given the level of income and savings of the household. For instance, early retirement may not be a practical goal for a single-income household with multiple members.

Not aligning goals with investments

Delinking the goal from the process of accumulating the corpus required to meet it is another frequent error people make. The investment options you choose to accumulate the funds required has to be aligned to the features of the goal.

You may put a near-term goal at risk if you channel savings into equity products for higher returns and your savings lose value in a market downturn. Similarly, you may be condemning your long-term goal to being underfunded if you ignore the time horizon available to take some risk for better returns and your savings are invested in low-risk fixed income products.

Other investment features that need to be aligned to the goal include the ability to generate income, liquidity, volatility in value, ability to make periodic investments and others. For example, a product such as the Public Provident Fund (PPF), which does not pay out regular income or allow regular withdrawals, is unsuitable to hold a corpus accumulated to meet regular monthly education expenses at the stage when the goal has to be met.

Not defining specific goal posts

Just stating the need but not defining the goal posts to work towards is unlikely to give the results you seek. For example, if your goal is accumulating the down payment for a home in five years but you fail to quantify the amount required, you will not have a target to work towards.

Goal posts also allow you to measure your progress towards a goal and take corrective action if you are falling short before it is too late. This is particularly important for long-term goals of large value, where you are tempted to give preference to immediate goals in the hope that you can catch up later. Break large, long-term goals into smaller short-term goals to make it easier for you to measure progress and make it seem less daunting and achievable. As you get to each short-term post, it will motivate you to stay the course.

Similarly, “I want to retire early" is unlikely to get you to your goal since you are leaving it open-ended. But “I want to retire at 50" gives you an end date to work towards.

Ignoring the importance of flexibility

Another common error that most people make is not realising that needs and goals are dynamic and their features change over time. This necessitates changes in financial actions taken for the goal. For example, a goal that you see as long term will reduce in term as time passes. Accordingly, the investments made also need to be rebalanced to reflect the risk that you can now take given the shorter holding period.

Similarly, you have to be flexible about goals. You may have to consider postponing your retirement if some of the savings have been diverted to, say, sports coaching for your child. Or, existing goals may cease to be relevant and new ones may take their place. The savings already made for the erstwhile goals may now be assigned to others.

But remember, the investments have to be rebalanced to reflect the needs of the new goals for the fit to be right.

“A financial plan made today is based on the information available now, which will not be relevant forever," said Suresh Sadagopan, founder, Ladder7 Financial Advisories.

Not building review into the planning process

Setting goals require making assumptions about a number of factors. The cost of meeting the goal is estimated based on the current cost and estimated inflation. The savings is based on the assumption on your income and ability to control expenses. The investments are selected based on the expected performance. If any of these assumptions change it leads to a change in your goal post.

A periodic review of these assumptions will help spot deviations early and take corrective action. It will also help you plan ahead if you find that you are going to fall short on your requirements. It is important to build a review process into your financial plan to account for the dynamic nature of goals and to translate the changes into actions.

Set a review cycle, say, annual or semi-annual, to assess the relevance of the goals themselves and the validity of the assumptions made.

Before you include a goal into your plan, ask yourself why it is important to you. If your goals are not driven by the right reasons, then it may be difficult to be committed. Don’t let setbacks in the journey to your goals take you off track. Stay focused and seek help from a financial planner or others, if required, to get back on course to make a success of your goals.

Nilanjana Chakraborty contributed to the story

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Published: 14 Aug 2018, 09:15 AM IST
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