Why Goal Setting Matters

The recent popularity in DIY (Do it yourself) investment platforms has brought the importance of setting clear financial goals into focus. But the truth remains that while most of us save money in some way or the other, very few of us actually align them to our future goals. If you’re an ad-hoc saver, here are five good reasons to chart a roadmap of your financial objectives, and map your savings to them.

It enforces savings discipline

When you’ve got a well-defined set of goals in front of you, you’re a lot more likely to save for them in a disciplined way. While the normal approach to saving is to “save what’s left after spending”, having a goal plan in place flips this approach to the healthier act of “spending what’s left after saving”. Instead of arbitrarily putting away lump sums of money as and when they become available to you, a goal plan typically results in your putting your monthly savings on auto-pilot mode, just like an EMI in reverse – minus the interest, and plus the profits that accrue from compounding, of course.

It encourages long-term thinking

Those who have clearly defined goal plans in place tend to adopt long-term thinking with respect to their investments. What this essentially means is that they will be less impacted by the inevitable vicissitudes of markets, and more patient when it comes to riding out cycles with cool composure. Additionally, linking savings to time-bound goals implicitly forces you to link your asset allocation to your time horizon. What this means is that savings that are being channelized towards a car planning goal that is 12 months away will flow into a more non-volatile and liquid asset class than say, savings that are being earmarked for your retirement goal that’s thirty years or more away.

It reduces Financial Stress

Not knowing whether you’re on track to meet your financial goals – such as your child’s education, or a comfortable retirement for you and your spouse – unsurprisingly tops the list of financials stressors for more individuals. Although you may actually be saving an adequate amount each month, the lack of awareness regarding your level of preparedness for your life’s critical milestones could leave you feeling stressed and feeling out of control of your family’s financial future. Having a goal plan in place will take away much of the unease, and help you build a sense of comfort and security about your financial future.

It inflation-proofs your savings

While inflation continues to gnaw away at the real value of our investments, most ad-hoc savers continue to turn a blind eye to it. Typically, unstructured savings tend to flow into traditional asset classes such as fixed deposits and life insurance, which do precious little to cushion our savings against inflation. By forcing you to consider inflationary trends while mapping out important financial objectives, goal planning helps inflation proof your savings. A concrete, well defined annual step up plan, and the selection of more aggressive asset classes such as equity mutual fund SIP’s, are the two more common outcomes of goal planning.