Identification of Financial Goals

An investor saves to-day, to meet certain financial needs tomorrow. Unless the investor is clear about the purpose of saving, his efforts would not result in the desired benefits. Therefore, an investor must first identify his financial needs. The financial objectives for which planning of investment to bemade should be defined clearly and be measurable in money terms.

The first step for an investor is to clearly write down the financial needs. The financial needs would be expressed in terms of the amount required and the future date on which required. For example, an investor may have one or more of the following financial needs:

1. To retire at age 55 with an annual income of Rs.3,00,000. I am now 35 years of age

2. To completely pay off the housing loan by the time I retire 20 years later.

3. To pay for my five year old daughter’s college education that would cost me Rs. 1,50,000 per year for 4 years.

To provide for more clarity the above example can be amplified in the form of a table as under:

• Every investor should take out time and prepare such a statement of financial goals covering as many requirements as possible. This is the basis on which the financial plan would be prepared. If the financial capability is found to be inadequate to meet all these goals then they have to be prioritized.

• The investor’s financial needs depend on the age, stage in the career path, size of the family, needs of the other family members, etc. Some of the needs can be identified with precision while others can only be tentatively determined. There may be unanticipated needs as well for which provisions have to be made. Sometimes financial needs change with investor’s changing circumstances.

• In order to prepare a financial plan, these goals have to be stated in clear and determinable terms of age, amounts and time frame. The financial planning process is merely an exercise of allocation of today’s money to meet tomorrow’s needs. The financial plan is not static. It has to be reviewed from time to time to account for the changing circumstances.

An investor needs to set aside some money today to realise the financial goals stated in the financial plan. How much money can be set aside now depends on present circumstances. This can be understood by assessing the income, assets and liabilities of the individual investor. The balance sheet lists the investor’s assets and liabilities. Hopefully, the assets exceed the liabilities and this excess is the net worth. All assets and liabilities should be valued at the current market value instead of any cost basis. For example, if you own an equity share bought at Rs.1,000 and it is worth Rs.5,000 now, your balance sheet should reflect Rs.5,000.

An investor should live within his means. Means is the income. Out of this income, routine expenses are met. The remaining amount is available for savings. An investor should prepare a statement of income and expense. It is called "Cash Flow Statement". The sources of income are the salary, dividends, interest, self-employment earnings, etc. After identifying the income, an investor should identify the expenses. Expenses are generally grouped into living expenses, payments already committed and taxes. The excess of income over expenses in each year is the amount available to save. The investor tries to achieve his financial goals subject to his saving capacity. The Cash Flow Statement is prepared under different scenarios. These are death, disability and retirement.

Financial planning is the process of assessing the prospects of meeting as many of the investor’s financial needs as possible with his saving potential. The source data for this planning is the balance sheet, which shows the investor, what he owns and owes, and the cashflow statement showing the money available for making investments. Together, these two statements tell the investor’s financial circumstances and saving potential. The savings are made in a number of investment choices available in the economy with a view to meet the listed objectives.