I started having financial planning discussion sessions (or what I jokingly call as ‘classes’ – but then the name stuck) with my friends, as I come to the realization that not everyone are equipped with the knowledge to plan their financials thoroughly. As a business student focusing in finance courses, the exposure to the topic has started early and my awareness have been nurtured since I have not even earned my own money. When I was in university, there was even a personal financial planning class that I took, which really changed and improved my perspective towards financial habit and investing.
However, it is not always the case for my friends who pursued other major (i.e. science or engineering), even when this topic is actually not specific to only business students to learn, but to everyone as a life skill to manage their wealth. Hence, the reason why I started sharing with people who feel interested to know more and want to learn together with me despite all my limitations. (Thank you for trusting me to give you your exposure to the topic guys, hope you are not disappointed!)
In short, after I had several meetups and discussion with my friends regarding how to manage their financials, I found similar questions and thinking pattern popping up from my friends. Disclaimer: My friends are mostly fresh-graduate who has just started working on their first job and university students who are in the same life stage as me, so this might be one of the reason why there is a kind of uniformity. More than that however, another interesting thing I found, which I believe transcend even life stages, is that: All of us (including me, before I push myself to do the work and can finally define my financial goal) want to start investing, without knowing what the money would be used for.
To be fair, we all roughly know what we want to use our money for. Some people would say, “I’m saving up to travel” or “I want to buy a new car,” most of us have things we want that require money, hence the reason why we want to save up. We also meet the likes of people who save up by reasoning: “to make sure I have money, just in case anything happens” which is a reasonable thing too! Of course we have to prepare money for situations like that, but I would define is differently than a ‘saving.’ I would call it an ’emergency fund’ which I have to have first in a comfortable level/amount for myself before I start saving up for my goals.
All this reason to start saving, even though valid and good, is still a very broad ‘want’ which we could not yet define as a goal. Many question will pop up after the want – When do you want to go for your travel? How much money is needed to buy a new car? How much should I save up every week/month/year? And this is a part of setting up our financial goal – making it as a ‘SMART’ (Specific, Measurable, Actionable, Realistic, Time-bound) goal which we can track and achieve. (Yes, I also can’t believe that I’m using a project term to explain financial goal settings, but it is relevant!)
Defining our financial goal, in my opinion, is the first and foremost important part of starting our financial planning journey, and for good reasons:
- Financial goal will define what you want first – Usually, queries and or requests are not fulfilled in the best way and give satisfactory result, because we don’t actually know what we want. The same goes for financial planning. Defining goals will give you an end in mind and purpose to why you are putting a part of your money away in a saving account, deposit, or stocks (separate discussion would be needed on their differences and why it is advisable to use different types of financial instruments!)
- Saving without goals is dangerous – it encourages us to use the money for impulsive desire that we might regret later – Without having a goal, then we would put all our money in one place, and it gives us the false sense that we are ‘rich’ and we feel like we are entitled to take and use that money anytime. Oftentimes, this could lead to justification of using the money to buy things that we want, but only in the moment. For example, using the money to buy shoes, or to buy new clothes. We won’t realize that our vacation dream’s fund is actually being eaten by these impulsive wants, until we come to the point when we see our savings account and said; “Huh, where did all my money go?”
- It serves as a project roadmap – Fulfilling our financial goals will usually take months or even years to achieve. Even when we want to use up all our earned money for one sole goal at one time, it will be hard as we still would have to fulfill our basic needs first. Hence, we could get lost in the middle of life and forgot that there are things that we want, but need ample planning to get.
Making SMART financial goal is also not a very hard exercise. My pro tip to start listing down financial goals would be by using these few questions for each ‘wants’ that we have:
- What financial goal do you want to achieve? In here, we can list down all goals (which needs money to fund it) that we want to achieve. Is it having a new car? Traveling to Iceland? Going for grad school?
- When do you want it? After we can write that down, now we set a time-bound or simply a deadline on when do we want to achieve that goal. Basically, how many years from now do you plan to get that new car? This is still flexible, after all it is a plan, only so much that we can control.
- How much is it? Do your research on roughly how much will it cost you to reach that goal. It doesn’t have to be specific, but at least be realistic about it.
- Where will you invest it? Answer to this question will be impacted by the time and the cost of the financial goal itself. The type of financial instrument used, the deadline on when we will need the money, and the return we expect from the investment is the first guideline on where we can start our research on the investment. Deciding on where to invest our money would need its own separate discussion for a comprehensive explanation! However, for simplicity, we can start by putting the deposit rate of a bank of our choosing as a starting guideline. Just to give a rough sense on how much return we can get from putting our financial goal savings in a bank account. Or for even simpler approach, just put savings with no expected return at all (0%).
After we can answer these questions, we can have a simple table consists of all goals with the cost and time breakdown. If you are able to do this, congratulation! You have started taking better control of your life and to invest your money purposefully 🙂
I believe that materializing our wants as a SMART financial goal is the first step everyone can do to start their personal financial planning journey. Especially when we are still young with no one to worry but ourselves, this could also serve as a practice before our financial spending gets even more hectic and complex in the future, with bills to pay and people being dependent on us. Give goals a budget and deadline to increase their urgency, and we would naturally start saving up smarter, as we have given our savings a purpose. Hope this article stresses the importance of defining our financial goal, and helps in giving a place to start to anyone who wants to start taking control of their financial life!