5 Steps to Ensure You Are Investing Right for Your Financial Goals

While your dreams should not have any limits, you must differentiate your goal from your dreams. We all want to be rich, live a luxurious life, and buy everything we wish to have without any financial stress. However, you need to understand that your dreams are not your goals. While being rich and living a luxurious life can be a dream, it cannot be your financial goal.

Here are 5 steps to follow to ensure you are investing right for your financial goals:

1. Set S.M.A.R.T. Financial Goals:

Your financial goals should be Specific, Measurable, Achievable, Realistic, and Time-bound. So, in short, your financial goals should be S.M.A.R.T.

  • Specific (you should be specific and clear about what you want to achieve – I want to buy a car);

  • Measurable (your goal should be measurable so that you can track your progress and know when you have achieved it – the on-road price of the car is Rs 12 lakhs today);

  • Achievable (you should not set your expectations too high. Rather, it is best to know your potential and take small achievable steps – I can contribute Rs 3 lakhs in a lump sum and Rs 25,000 in a monthly SIP);

  • Realistic (know your current financial circumstances and recheck whether your goal is realistic to avoid giving up later – considering the inflation, I can generate adequate corpus with the investment I can comfortably make), and;

  • Time-bound (give your goal a time frame to accomplish so that you do not procrastinate and keep yourself accountable for the outcome – I want to buy the car in the next three years).

Your S.M.A.R.T. goals need not be common, like buying a house and a child’s higher education; they can be unique, like opening a beach-side restaurant post-retirement. So, in this case, apart from the common goal of creating a retirement corpus, you also need to make sure you invest an adequate amount for your unique financial goal of opening a restaurant after retirement. The more relevant your goals are, the more you will be motivated to work towards achieving them. But any vagueness around the goals can become an obstacle to achieving them.

2. Prioritise Your Goals:

It will be easier if you have to address one financial goal at a time. However, as discussed, an individual may have to address several financial goals simultaneously. Hence, setting your financial goals right and prioritising them is important. So, creating an education fund for your children’s education can be prioritised over an annual international holiday. When prioritising your goals, make sure you check the time frame you have given to the respective goals. This will ensure you have set the goals right and you accomplish them within the target date.

You can classify your financial goals into short-term, medium-term, and long-term goals. So, creating a contingency fund could be your short-term goal, whereas retirement could be your long-term goal. That said, be careful when classifying your goals, as buying a car could be a short-term or medium-term goal for many, but if your goal is to buy a BMW, it cannot be achieved unless you invest a big amount.

3. Consider the Inflation:

You might already know that inflation hits your financial plan on multiple counts. Apart from impacting the real returns you will earn on your investments, it also impacts the way you plan your goals. When planning for your long-term financial goals, you should be aware of the cost of achieving the goals. Hence, it is crucial to consider the impact of inflation when planning your long-term goals, making long-term spending plans, and investing towards your long-term financial goals. So, if the inflation rate is 7%, you are required to invest in financial instruments that yield an additional 7% return. Investing in asset classes that have the potential to yield higher returns than the inflation rate, such as productive market-linked instruments like stocks and equity mutual funds, can help you generate inflation-beating returns and create wealth in the long term.

4. Understand the Risk-return Spectrum:

Choosing suitable investment avenues is a crucial step in financial planning. The time in hand to achieve your goals and your risk appetite largely decide how your asset allocation would look like.

It is important to understand that for every return you seek, there is a certain level of risk associated with it. Each asset class, such as equity, debt, real estate, and gold, or the category of mutual fund scheme you choose, comes with a certain level of risk-reward.

Unfortunately, as a country, we love to invest in fixed-income products like bank fixed deposits and recurring deposits, irrespective of the time in hand, to achieve our objectives. While fixed-income products like bank fixed deposits offer guaranteed returns and carry low risk, they generally yield lower returns than the inflation rate. Hence, it does not make sense to invest in such investment avenues for the long term. On the other hand, while market-linked financial instruments like stocks and equity mutual funds have the potential to generate inflation-adjusted returns and create wealth in the long term, they carry higher risks. However, in order to diversify the risk, you can consider allocating a small portion of your investment to safer financial instruments.

5. Understand Your Risk Profile:

Since all the asset classes and mutual fund schemes carry some investment risk, your investments should always be aligned with your risk appetite and its suitability to your financial goals. Hence, it is best to first understand your risk profile and the suitability of the investment avenue for your financial goal, then choose the suitable one.

Risk profiling determines your capacity and willingness to take a risk. It can be measured by considering various factors, such as your age, investment objective, time horizon, and knowledge of financial products, among others. Therefore, your investment decisions should not be based merely on the potential returns, and it is crucial to weigh your risk appetite against the risk involved in the respective investment avenue. Analyzing your risk appetite and choosing the right asset classes based on your risk profile is an important step to ensure you are investing right for your financial goals.