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The first step towards achieving financial freedom is to set small financial goals and conquer them. Setting your financial goals puts you in charge of your money and your life. Your goals can be short or long term, small or large, but they all need to be achievable.
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Financial goal planning help you determine where you’re going with your money. Apart from bringing in discipline and being inspirational, these plans can help you create a strategy for paying off all of your debt while saving for a new house.
Savings and financial goals
In order to achieve our financial dream it is paramount to start saving. Since income stream is capped for a salaried person he or she would need to run a tight ship and save as much as possible. Of course additional revenue will only speed up your journey towards meeting your financial goal. In case there is little scope for adding new revenue stream we need to get our priorities right. Cut down on wasteful expenditures. Even a small amount saved can build up over time to meet an important goal.
Saving and paying off debt
One definition of financial freedom is to be debt free. It is important to be free of debt as soon as possible. One of the first goals in financial planning is to progressively reduce your debt. The highest cost debts, like those of credit cards need to be paid off before the lower cost ones. Those debts which provide tax benefits can be kept till the end, if need be.
If possible look out for possibilities of restructuring your loans or move to banks or institutions that provide lower interest rates. If you have a good payment track record banks would compete with each other to have a premium client like you and offer lower rates.
Ones you have identified a mechanism of lowering your debt outgo, the next step is to identify your financial goals. Split your goals into long term, medium and short term goals. Be specific and realistic in setting your goal. You can also set up goals as big and small goals. For example, big goals can be classified as retirement planning or buying a house. Planning your vacation or buying a car can come under smaller goals.
Putting a price tag
After identifying a goal put a value to it and a timeframe. Take for example you are planning to buy a car. Do the research on the type of car and arrive at a tentative price range and when do you intend to by it.
Do the math
Now that you know how much it is going to cost you to meet you financial goal, do the reverse calculation. Check out how much money do you currently have and are willing to allocate to this goal and how much do you need to meet the target. You can invest the starting amount in an instrument which should match with the duration of when you need to meet your goal.
Deduct the amount on maturity from the amount you need for your goal. This shortfall is the amount that is to be generated through monthly savings.
Knowing the amount you can save every month use the compound interest calculator and play around with the interest rates to match your shortfall amount. Remember to be realistic while doing the iteration. You can stretch your period in achieving the goal but you cannot have unrealistic interest rates at which you would be saving.
Review your goals
Review your progress regularly and take corrective measures to stay on course. If you are nearing your goal and in case you have invested in a riskier instrument, say equity, it is advisable to shift to a less riskier option rather than see the entire efforts go to waste in case of an adversity.
Creating your financial plan takes a significant time investment at first, but documenting your goals can help you save time and money in the long run. With a plan in place, you can set milestones that will keep your finances healthy.
The discipline of monthly savings is a very key ingredient in meeting your financial goal. It allows you to keep control of your expenditures which ultimately helps in achieving your goal. Its like those tiny monthly droplets that help fill the ocean.
Couple of teasers for our readers
Why is it important to repay short term debt before planning for your future
Is it advisable to pursue multiple financial goals at a time or to focus on one at a time
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First Published: Fri, February 27 2015. 18:48 IST