The Money Hans’ Post

Transcript

Hi. Let me ask you this When we're leaving the house, we usually know where we're going, right? Whether it's work or college or shopping or a party, we decide. What method of transport? A car or a bus or a train? And also how we get dressed right. Similarly, in life we need to know where we are going so we can plan our finances accordingly. I know, I know, you will say life is unpredictable. And how can we plan? Well, we need to have some idea of what we want to aim for. Only then can we at least get in that direction. I know we can overshoot or undershoot a little bit, but at least we will get in that direction and in that level. Hi, I'm Hansi, and in today's episode we will talk about goal setting, what it is and how to do it and why it's important to do it right. So the first step in goal setting is deciding what goals you want, but also when you want it and how much you want it. In jargon, it's listing the goal, setting the time frame, and then setting the priority. Let's get into it. So the first goal that you should have is an emergency fund. So if you don't have an emergency fund already, please put that on top of your list. It should be ideally three to six months. For some jobs it might even be for 12 months, so depending on how unstable or stable your job is, you might want longer. The second goal for everyone should be paying off your debts. So if you have especially high interest rate debt, you might want to pay that off very, very quickly. After that, the list could be put in various buckets. Most people have a bucket of food, clothing, housing, so Rutika, Branagan and then also educational. Our weddings, travel and things like that, and perhaps also leaving a legacy for your kids or a charity, so that's still what you want. Fairly easy right? Now comes the time frame. You don't have to be precise, but you would want to put down when you want this in, say in the if it's zero to three years, so between now and within three years, that's short term. If it's between 3:00 and 6-7 years, say seven years, it's medium term and beyond seven years is long term. So you have to broadly figure out when you want it. Now, different people may have slightly different time frames, but doesn't matter short. Medium long term works. Then comes the complicated part and that's how much you want it in technical terms, the priority or the probability of wanting that goal. So let me explain the housing, clothing and food is something you must have, right? But you may say that the Dal chawal basic food is a must have but then. Dining out or or and and fine dining is a nice to have or a want, so there could be different levels of it. Similarly Rutika Rama Khan is a must have. But perhaps the education or the travel is something nice to have or a wish. So you have to list your goals and then assign a probability or a need. Now what does need want and how are they different? Well, if it's a must have say a 95 to 100% probability. Nothing in life is 100% by the way, so say 95% probability, then it's in need. If it is say between 70 to 80% probability it is a want, and if it is between 50% to 70% probability itself desire or a want. Yeah, it's a desire. Some people call it dream, some people call it aspirational, some people call it whatever, whatever. It doesn't matter what you call it, but that's the rough probability of meeting those goals. So basically goal setting. You need to list your goals, you need to set a time frame and you need to set the importance. There is a framework, a concept where you can put all these in a matrix structure so you can see all your list time frame and importance and then you can make trade-offs. You will need to make trade-offs at some point when you don't have money for everything, but we'll get there. So first go ahead and do this. Now let's get to the second step. The second step of goal setting is estimating what that goal will cost. OK. So how do you do that? Well, we had made the list of the goals and we put it on the time frame, so we can say how much it might cost in today's rupees or how much it might be in future rupees, right? That's one way of doing it. So this way is financial modeling way of doing it. You put all your goals on a timeline and then you estimate the cost today or in future and then you bring it back to today's currency. It sounds the most comprehensive. It is the most comprehensive, but there's a lot of moving parts. So for example the inflation assumptions, are you using one inflation for all the goals or are you using different inflation numbers for the cost of living versus your income jumps versus specially what health and education will cost? More recently, health and education inflation has been much higher, orders of magnitude higher than than what your cost of living assumptions are. So you have to ask your financial advisor on how much detail has gone into it. And here's the thing, the more detailed, more moving parts something is, chances are that it's not as accurate. So don't get fooled by it being the scientific way. It's one way. Another way that people do it is goal based financial planning. So what they do is they list all the goals and then they put the assets against it, OK? And then you can kind of see what goals are likely to be. Yet and what you need more money for. So for example it could be that your kids education which is happening say in the near future, you put your fixed term deposit against that, your retirement against your say a holiday home, things like that that you can match up and see what is missing. The 3rd way of. Estimating the cost of these goals is something that is called a rule of thumb or heuristic method. It's something that I recommend just to get started. How it works is that you list all your goals, what the annual cost of that will be, and then you multiply that by a multiplier, a factor. Which usually is between 20 and 40. I've taken 30 as the midpoint and that assumes that. It would be invested well in a balanced portfolio. So let me explain. Say you put down all your goals of say, a housing, food, clothing, travel, education, all of that annual cost is say. Say 12 bucks a year. Yeah, you multiply that by 30 to figure out the corpus that you would need to fund that lifestyle. On the assumption that it's invested well. And then on top of that you Add all your lump sum sort of requirements, things like the emergency fund or a legacy you want to leave behind or a one off round the world vacation, things like that. So that's all rule of thumb method of doing it. It also has some assumptions but they are easier to manage. I recommend starting with this and then perhaps looking at the other two ways as well. So there you have it. So you have to list your goals 1st, and then you have to estimate the cost. There's a lot of moving parts in it, but good enough to get you started and aiming in a certain direction. So there you have it. Now you know what goal setting is and how to do it. So basically it is what goals you want, when you want it, and how much you want it. By doing this whole exercise, you understand the tradeoff between time horizon and how much you wanted the priority, the the probability of meeting it. Whether you're doing financial planning yourself or working with a financial advisor, you need to know all these things, ideally beforehand so you can have a proper conversation with them. Hopefully you can get started and see you in the next episode.