Sunday, July 20, 2008

Financial Planning Talk (4): Setting Financial Goals

Before we set our financial goals, we should understand well about our current financial situation. After we set our financial goals, then we can plan for implementation plan according to our financial goals. For financial goals, we should set long term goals and short term goals. Having short term goals, it is easier for us to plan for the implementation plan to achieve the goals. And these short term goals are the progress to achieve the long term goals.

Why we need short term goals? If we set our financial goals as to retire early with 1 million ringgit after 15 years, it is very difficult for us to have a proper investment plan which can help us to achieve the goals. However, if we consider our current financial situation and set some short term goals which can help us to achieve the financial goals eventually, it is easier for us to have a good investment plan.

Typically, we should first examine our assets and debts. Debts must be paid off before we start our investment plan, unless the interest of the debts is less than the return of the investment. So, for this example, we can set some short terms goals, such as pay off all bad debts within 1 year, then save for a certain amount for investment within 3 years, meanwhile invest the money into different investment tools with different rate of return, targeting to get 200 thousands within first 5 years, then 500 thousands after 10 years, and eventually achieve 1 million after 15 years.

By having a clear target within a shorter period, we can set a proper investment plan easily and more important, we can review our financial planning periodically and justify if we are going the right way. If we cannot achieve the short term goals, we should review our long term goals and investment plan, and revise the plan in order to achieve our financial goals eventually.

This is just an example, we can set any short term goals that we need to, such as for some purchases or traveling and so forth. Anyway, we should always set goals which fulfill the 5 features that I mentioned in earlier post, which are SMART (Specific, Measurable, Attainable, Realistic, Timely).


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