Each human being toils hard every day to earn money. Apart from meeting the basic needs for sustenance, we earn money for our future. To ensure that we appropriately channelize our savings towards certain purposes, we must set some short-term and some long-term financial goals. The terms are quite self-explanatory: the short-term goals are to be tackled immediately whereas the long-term ones can take longer to reach. These goals are to be approached in different ways. Read on to learn how to categorize your financial goals and learn some pragmatic ways of venturing towards them.
Understanding Short-term Goals
Certain expenses in our lives cannot wait and we need to handle them immediately. Can you withhold your house rent for a couple of years? Can you afford to delay paying your monthly bills? Can you live without buying the basic necessities for a livelihood? If you stop or procrastinate on these expenses, your life might come to a halt. These are your short-term goals.
Short-term goals refer to your immediate expenses. These generally include the various things that you need for a living and some other expenses that you need to handle within a few months or a couple of years at the most. Your basic needs like rent, insurance, monthly bills, etc. fall under this category. Paying off smaller loans, purchasing things on your wish list, traveling and even saving for your wedding are your short-term goals.
Understanding Long-term Goals
Now, look far into your future and think about the expenditures that you can envision. Consider the expenses that you can foresee after at least a decade. These are your long-term goals. Your retirement fund, your kid's education fees, future family expenses, your dream to start a business, paying off that annoyingly hefty mortgage - these don't come cheap and require a lot more money as well as attention. Despite being apparently distant, these financial goals are always stacked up in one corner of your mind as you constantly strive to save up enough for them.
Understanding the Overlap
Let's say you want to buy your dream car. Should you buy it now or wait till you are financially stable? What about the down-payment for the lovely house that you cherish - do you want the house soon or can you wait till you are a little older? How much ever you try to separate your goals, there are a couple of things that can fit into both categories. It all depends upon your desire and affordability - would you like to handle these expenses now or later? This overlap is referred to as your mid-term goals.
Sometimes, certain financial expenses can be quite tough to estimate. An emergency can come as a bolt from the blue. You can never know when your car will break down and need a repair, or when your medical bills will pop up. Since these expenses come randomly and are totally unpredictable, it is safe to consider them as your short-term goal. They are omnipresent at all stages of your life.
Prioritizing the Goals
You should always be prepared to simultaneously deal with a combination of short-term and long-term goals as we proceed. However, you cannot possibly handle each of these goals at once, right? That's where you need to prioritize. Your basic expenses should be your top priorities. Saving for emergencies and your retirement fund shouldn't take a back seat either. Channelize your expenses towards these goals first and then move on to paying off debt. If you have some money left, decide whether you would like to save it or spend it on your 'wants.'
Setting a Budget
Once you have more or less segregated your financial goals and set them into your priority list, you need to figure out ways of achieving those goals. The first step would be to track your monthly expenses. Critically observe your spending habits to understand where you are overspending. You could also find out ways to control your spending habits and free up more money for achieving your goals.
By now you would have determined how much you can afford to spend and save each month. Accordingly, set up a monthly budget. You could begin with the popular 50-30-20 budget plan until you formulate your own budget plan. Being on a budget will help you restrict inessential expenses so that you can set the savings aside for reaching your targets. Set a timeline for your goals; work hard to accomplish them.
Saving in a Safe Place
Simply saving some portions of your income every month will neither optimize your savings nor synchronize your savings and goals. You need to find the right and safe place to save the money allocated for each financial goal.
Set up automatic payments for your credit card bills, loans, utilities, debt repayments and insurances, to ensure that you do not miss a single payment. If you consider yourself too frugal and doubt your ability to save, you must opt for a Recurring Deposit (RD) scheme or a Systematic Investment Plan (SIP) to sweep away your savings as soon as you get your salary. This will keep your money safe and keep you off unnecessary expenditures.
Your emergency fund must be readily accessible. Locking it up in a long-term deposit scheme like PF, PPF or ELSS doesn't make much sense. You need a deposit scheme where you can access the money quickly without paying a penalty charge. Savings account could be the perfect solution. For your other short-term goals such as vacation or wedding funds, you could deposit the accumulated money into a short-term Fixed Deposit (FD) or a Debt Fund until the right time.
The money for your mid-term goals can be invested in long-term Fixed Deposits or Equity Linked Saving Schemes (ELSS). In this way, you can lock away your money for a few years, save tax as well as build a positive return. If you are saving for your newborn's future, you could invest the money in your Public Provident Fund (PPF). It is a secured investment scheme that locks your money for 15 years but gives a reasonable rate of interest.
Accomplishing your financial goals could be slightly demanding. Teach yourself to manage your money well - that's the key to attaining your short and mid-term goals. Learn to invest carefully for your long-term goals - differentiate the risky schemes from the safer ones. Invest your savings in a plan that keeps your money secure and promises a handsome return. Learn to grow your money for your long-term goals. Create and follow an ideal budget to cater to your needs.