What Should Be Our Financial Goal?
Contributed By - Sat Parashar, PhD
Did this question confront you, ever? When I visit my bank, I find a question smilingly staring at me, asking, what is your goal? This question equally stares and asks every customer of the bank, the same; as it has been nicely printed and hanged behind bank service counters. The employees manning those counters, invariably, display their personal goals on their chests, like vacation, education, home or something else.
Those of us who have visited financial advisors and planners would readily recall that each meeting, after greetings exchanged, had the first question shot by the advisor, what is your financial goal? An investment advisor would like to, first and foremost, know whether your goal is income, growth or balanced, that is, a combination of both.
Apparently, being ‘personal’ financial goal, it must be personal or individualistic and may differ from person to person. So 7.65 billion people on this planet, at the time of this writing, should have at least 7.65 billion personal financial goals. Further, the personal financial goal of the same individual keeps changing depending upon the life cycle stage like being a school student, college student, unmarried, married, having kids, growing kids, grown up kids, empty nester.
As per Indian ancient philosophy, finance (Arth) is one of four goals of life, namely, Dharam (performing duties to humanity), Arth (generating Income and accumulating wealth, ethically and morally), Kaam (fulfilling worldly needs and desires) and Moksha (renouncing craving for worldly desires and possessions and pursuing self-realization).
Well, that Arth goal statement is fuzzy, to say the least, and definitely very challenging, in a world where worth of a person is primarily judged by his/her net worth, irrespective of means and methods adopted. A more practical goal statement should rather be: How much money is good enough money? Again, I came across, a piece of Indian traditional wisdom, in this matter, that says, ‘Bhagwan itna dijiye, ja main kutumb samaye; Main bhi bhookha na rahun, saadhu na bhookha jaye’ (O’ God, please I should have so much (income and wealth) that me and family should be able to fulfil our needs as well as support holy persons who have renounced worldly life.)
The wisdom thus is that good enough money is that amount of money that takes care of our financial needs including supporting those who deserve our support. Well this can be expressed in dollars and cents. To be able to do this, we shall need only two numbers, namely, net expected average annual expenses and net expected rate of return.
To illustrate, let’s assume that Joe would need net $50,000 each year for the rest of his life. If average expected net rate of return in the financial markets is 7%, his financial goal should be to have a net assets or net worth (assets minus liabilities) of $714,286, that is, 50000/7% or 50000/.07). To provide for expected inflation of 2%, he would require $1,000,000, that is, 50,000/(7% - 2%) or 50000/.05).
Well, if average annual expenses, average expected rate of return in the financial markets, and the inflation rate differ from the above scenario, the formula will remain the same, but final numbers may be drastically different. It is therefore advisable to develop best case and worst case scenarios and then target, perhaps a range rather than a number. The formula further assumes 100% safety of investment, that is return of investment as different from return on investment.
We may conceptualize our financial goal as attaining Financial Independence; a state of nature where money works for you rather than you working for money; where food on the table is not an issue; where you work because you like to work, not because you have to work. All other goals like car, home, education, vacation may be called intermediate goals. To conclude, our financial goal should be attaining financial independence, as early as possible, but never later than becoming empty nesters.
About the author:
Sat Parashar, former Director, IIM Indore, India, is currently based in Glendale, AZ. His specialization is Economy and Finance. He has held positions including Chair Professor of Finance, Management Development Institute, Gurgaon, India; Head, Center for Banking at Bahrain Institute of Banking and Finance, Bahrain; Head of Research and Studies, Emirates Institute of Banking and Financial Studies, United Arab Emirates.
He is currently adjunct faculty at Rady School of Management, University of California, San Diego, CA, teaching Money and Banking.