Going From Financial Goals to a Financial Plan

The process of financial planning is a bit more organized compared to the traditional saving and investing approach. During financial planning, a comprehensive plan is created in such a way that the needs and goals of the individual are met at each stage. Hence, the financial plan of every individual is unique since it is based on their goals. There are certain guiding principles that are followed. However, the plans themselves are unique.

In this article, we will have a closer look at the steps involved in the process of converting financial goals into a comprehensive, integrated financial plan.

Segregating Goals based on their Time Frame

The process of identifying goals has been mentioned in detail in the article on the financial planning process. For an integrated financial plan, it is important to realize that not all goals are equally important. First of all, financial goals can have different time frames. Hence, they need to be classified as short term, medium term as well as long term. Similarly, the consequences of not being able to meet some goals are much more severe than others. Hence, goals need to be classified as essential and discretionary based on this constraint. This classification of goals ends up creating a priority of goals. For instance, goals that are classified as short term and necessary need to be fulfilled immediately.

Mapping Goals to Your Current Situation

The priority of goals then needs to be mapped against the current financial situation. This means that the current savings, investment, and income are analyzed, keeping the goals in mind. In this situation, many people realize that their income is not enough to fulfill all their goals. Alternatively, they may also realize that fulfilling one goal, such as having an expensive car, is actually having a huge impact on their other goals. This step is necessary to rationalize the goals which were created in step 1.

Identifying Constraints

The next step in the process is to identify the possible constraints or the things that could go wrong. For instance, people always start planning on the assumption that their income will always rise and that they will continue to be employed till age 65. However, this may not be the case in many parts of the world, people are now being forced to retire early.

Robotic process automation is making large volumes of human work obsolete. Hence, it is important to realize that job loss, illness, or such other negative events can happen in a person’s life. A good plan has built-in buffers for such events. It is important for investors to realize that stretching themselves out too thinly would only hurt them in the long run.

Choosing the Sequence

Now, based on the income and expense information and after keeping a certain amount of buffer, the investor now has to identify the sequence in which they want to meet their goals. For instance, do they want to meet all their short term goals first before they progress on to more long term goals such as homeownership and retirement savings? Alternatively, they could immediately start sending a certain portion of their money towards retirement and other goals while proceeding with meeting their short term goals.

Financial planners generally recommend immediately saving for retirement. This is not because the parallel investment approach is financially more beneficial. Instead, this is based on behavioral studies.

People tend to create multiple unnecessary short term goals and postpone investments in to long term goals. The end result is that the investing process gets derailed, and goals are left unmet. Hence, based on investor discipline, a particular approach can be chosen.

Identifying the Appropriate Investment Vehicle

Choosing the appropriate investment vehicle is of the utmost importance in financial planning. Also, this can be done with ease since the time horizon for the goals is known. For longer-term goals such as retirement, children’s marriage instruments such as equity can be used.

Equity is known to be extremely volatile in the short run. However, in the long run, it provides one of the highest rates of return. For medium-term goals such as house down payments, children’s education, etc. long term bonds can be used.

A lot of governments issue long term bonds which have less liquidity but offer higher rates of return. These instruments can be used. For short-term goals, simple vehicles such as a checking account, money market funds, or a certificate of deposit can be used. Here the objective is to ensure the safety of the funds and not growth.

Putting it all Together

The bottom line is that deriving of an integrated financial plan from a set of financial goals is extremely important. This helps the investor act in a cohesive manner. This is because they are constantly looking at the long term picture. As a result, they are unlikely to pursue a goal that is not important at the expense of one that is.

Proper planning allows investors to compare the relative importance that they place on each of their goals and allocate their funds accordingly.