Monday, August 21, 2006

Setting financial goal

In a race, a person who runs a pre-defined length of space and in the shortest time, wins the race. Similarly, to find whether we have achieved our financial freedom, we need to set our financial goals.

Setting a financial goal is not like, I would like to have 10 Lakhs in my bank account by the time I become 25 or so. It has to be calibrated to the current economic situation and it is also linked to the life style we live in and many factors like inflation and stuff like that.

By achieve financial independence, I meant that I wont be working for money as such. So this means I should have sufficient money power (buying power) to lead the remaining of my life. Quite a big target.

Assuming current inflation rate to be 6%. What does it mean? An item which costs Rs100 today would cost Rs106 a year after. So the buying power of the money reduces. So to retain the buying power of our money, we should also make our money grow by atleast 6%. Not a big deal to get that kind of return. But if we do only this then we wont be able to build assets and also beome financially free. So we need a higher rate of interest. I would discuss this in other post.

So coming back to the point, we should define our financial goals like this:
1. Long Term goal
2. Short Term goal
Long Term goal is the amount of money which I would like to posses say after 10 years

Short Term goal is the amount which I would need in a short period of time, say 1 year to 4 year.

There would be many short term goals like buying a house, buying a car, buying a land etc... But only one long term goal.
So the only consideration for setting the financial goals is that the amount you set up for the long term goal should be sufficient to live the remaining life without giving up our lifestyle and the long term goal should not hamper our short term commitments.

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