There are many reasons why setting financial goals can work well in achieving the expected outcome, in this article, we will discuss four primary reasons.

The saying goes, four is a party. When it comes to money matters four is a party that Goldilocks would have liked, just right, just enough.

Follow the rule of four and know the right reasons for setting your financial goals.

1. You stay focused

Setting a financial goal lets you clearly articulate what you want your money to achieve. Not just that, it will define your present and future lifestyle. For example, if your goal is to retire by the age of 40, you will end up focusing a lot more on increasing savings today rather than indulging in non-critical lifestyle spends. If the goal is achieved as expected, your lifestyle from there on will be more about freedom of time.

Had you not set a precise goal, achieving the outcome becomes hard. There are temptations abound and it’s easy to get distracted. Distractions lead to overspending, under-investing and even poor-risk judgement when it comes to deciding where one wants to invest. If you haven’t started on your goal early, you may chase high return options closer to your goal timeline and increase your chances of falling prey to the high risk too.

Once a financial goal is identified and preferably written down, you are automatically focused on achieving it. Do this early in life so that you don’t panic and make mistakes later. There will be more than just one financial goal, by defining each financial goal you can focus on assigning the right amount of resources and appropriate investment options.

2. Keeps your debt low

When you have a financial goal to achieve, it becomes a priority. Financial resources get channelled towards achieving those goals. Not just that, you will also consider other peripheral financial decisions like contingency planning and adding insurances where you need to protect health-related expenses and life insurance.

As the thought process gets aligned to thinking about achieving the goals, you will focus less on spending for wants which can potentially take away from what you are saving for your goal. When overspending is at a low or non-existent, your need for taking loans too will disappear. Housing loan which is the biggest debt that many have in their lifetimes may also get postponed as you focus on first saving and gathering enough funds towards your fulfilling your primary financial goals.

3. Preparing for retirement

There is a way to calculate an expected or assumed amount you need to have by the time you retire. In reality, this figure can very well be lower or higher than what you have calculated because a decade or two is a long enough time for many of the variable to change permanently. Over allocating for retirement is not a problem, because then you can live comfortably and spend more on your desires, but underachieving can have dire consequences. While you should calculate or estimate how much you may need, knowing that it could be inadequate is important. It means that whatever you are saving and investing towards your retirement goal can’t be compromised.

It’s not okay to take out Rs 10 lakhs from your retirement goal kitty and put it into an impromptu overseas vacation.

The amount may not be fixed, but allocating towards future retirement is done much more efficiently with the help of a defined goal.

4. Preparing for emergencies

Achieving an emergency is never anyone’s goal. However, when you do consider your future financial goals and providing for them, you will automatically look at the other side of the coin and think about what all can go wrong. This approach then helps you become prepared for any sudden events that could impair your future financial goals.

Let’s say you are saving up for your child’s higher education and that it is five years away. Given the economic conditions, you are not too secure about your professional income continuing to come in the same manner. The education goal is non-negotiable but you must provide for uncertainties along the way. You can then provide for this uncertainty by having an alternate source of income or creating an emergency fund to cater to lifestyle needs. If you don’t plan this out, any emergency will make you pull out of your child’s education goal kitty. The seriousness of the goal makes it important that you don’t fail the expectation, thus, it’s important to be prepared for emergencies too.

Setting goals, defining them, writing them down and then following through makes you aware of your life’s purpose and how far you are succeeding in achieving them. Undertaking goal setting is easier said than done, but it is that critical activity in your life that has the potential to change outcomes.