Goal setting
The first step of financial planning: turning a vague wish into a goal that is specific, measurable, realistic and time-bound, then ranking the resulting list by priority.
In plain language
'I want to be rich' is not a goal an adviser can plan around. It means something different to every person who says it.
Goal setting turns a wish like that into something usable. A proper goal names a specific amount, gives a date by which it is needed, and is realistic given what the person can actually save. 'Rs 50 lakh for my daughter's education in 12 years' is a goal in this sense. 'I want to be rich' is not.
Most people end up with several goals at once, and rarely enough money to fund every one of them right away. So goal setting does not stop at listing goals — it ranks them too.
How it works
The workbook sets out the features every goal needs: it must be specific, stating exactly what is to be achieved; measurable, so the exact amount needed is known; realistic, matched to what the person can actually save — the workbook's own test is that a person able to save around Rs 20,000 a month cannot realistically target a goal needing Rs 50,000 a month; and time-bound, with a clear date by which it must be reached.
Once the list of goals exists, it has to be prioritised, because income and savings are always limited. Goals that build the household's financial health — a child's education, retirement — come before goals that do not create an asset, such as a luxury car. The workbook's own example: a large credit card balance should be cleared with extra income before that income is spent on anything discretionary.
A worked example
Compare two statements from the same client. 'I want to retire comfortably' fails every test — no amount, no date, no way to measure progress. 'I want to retire in 20 years with a corpus of Rs 5,00,00,000' passes all four: it is specific, measurable, time-bound, and, if the client can save toward it, realistic.
Suppose this same client also wants a Rs 15,00,000 car in 3 years and is currently saving Rs 20,000 a month, only enough for one goal at a time. Goal setting is what tells the adviser to fund the retirement corpus first, since it builds the household's long-term financial health, and to defer or scale back the car, which does not.
Why NISM asks about it
Chapter 1 (Introduction to Personal Financial Planning), section 1.3.1 (Personal financial analysis), opens the financial planning process with goal setting and prioritising of goals. Expect a question testing whether a stated goal meets the specific/measurable/realistic/time-bound test, or one asking which of two competing goals should be prioritised.
Common exam traps
- A goal that is not measurable and time-bound is not yet a goal in the workbook's sense — 'I want to be rich' fails the test even though it expresses a real desire.
- Prioritisation favours goals that build financial health — education, retirement — over discretionary spending that creates no asset, such as a car or a holiday.
- Realistic is checked against actual saving capacity. A goal requiring Rs 50,000 a month of saving is not realistic for someone who can save only Rs 20,000.
Check yourself
1.What is the first step in the six-step financial planning process?
- a)Gather client data, including goals
- b)Establish and define the client-planner relationship
- c)Analyse and evaluate financial status
- d)Develop and present financial planning recommendations
Show the answer
Answer: (b) Establish and define the client-planner relationship
"a. Establish and define the client-planner relationship: The planning process BEGINS when the client ENGAGES an Investment Adviser and describes the SCOPE OF WORK to be done and the TERMS on which it would be done." Gathering data and goals is step (b). Note the distinction: goal setting is where the planning WORK starts, but the six-step PROCESS starts with defining the relationship.
2.Which of the following best distinguishes financial planning from typical financial advisory services?
- a)Financial planning is cheaper for the client
- b)Financial planning is comprehensive, goal-centred, internally consistent and continuously monitored
- c)Financial planning covers only investments while advisory covers insurance too
- d)Financial planning is a one-time exercise while advisory is ongoing
Show the answer
Answer: (b) Financial planning is comprehensive, goal-centred, internally consistent and continuously monitored
The chapter contrasts them on six dimensions: planning is comprehensive across retirement, insurance, investment and estate; goal setting is central; activities must work together and not conflict; monitoring is inbuilt; selection considers both return and risk; and there must be continuity. A typical advisory "could be a SHORT ONE-TIME EXERCISE or even PIECEMEAL efforts", which is the reverse of option (d).
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Risk profilingEstablishing how much risk an investor should carry by weighing three separate things — the need to take risk, the financial ability to take it, and the psychological willingness to bear it.
- Financial planningThe process of estimating what a person will need money for across their lifetime and building an investment plan to meet each of those needs — savings with a purpose attached.
- Financial goalA financial objective — a child's education, a house, retirement — to which an amount and a timeline have been assigned, so that it can actually be planned for and funded.
- Six-step financial planning processThe 6-stage sequence an Investment Adviser follows with a client — define the relationship, gather data, analyse, recommend, implement, monitor — set out in Chapter 1 of the Series X-A workbook.
- Staggering of goalsPushing a financial goal further out in time, instead of cancelling it, when the household's current finances cannot fund it in the period originally wanted.