4 foolish money goals... and 4 smart ones

Human beings need goals to survive. And it's not just goals at work that I am referring to. You need a goal to lose weight or to put on weight. To save money or to spend on a function. The list is endless. Which brings us to personal finances. Do you keep goals?

Even if you vehemently answer yes, are you doing it smartly? Here are four foolish goals and their smart variants.  

Wrong goal: I will save.
Smart goal: I will save 15% of my salary.

I learnt this from a dietician. "Saying I want to lose weight is pointless," she told me. "You must be clear how much you want to lose."

Ditto with your money. Saying you want to save will take you nowhere. Everyone wants to save but everyone does not get down to doing it.

Get specific. Put numbers to your goal.

I want to save 10% of my salary. I want to save Rs 3,000 every month. That will get you on track.

Else, you may end up saving Rs 500 the first month, Rs 1,000 the second month, and Rs 300 the third month.
Have you reached your goal? Sure, if your goal is just to save.

But, once you get specific, you get disciplined.

In this instance, it is wise to decide where you are going to invest.

Let's say you decide to save Rs 3,000 every single month. You also decide you want to distribute the money between a safe investment and a risky one.

So you pick up on a diversified equity fund and, every single month, you decide to invest Rs 1,000 in it. This amount can be directly debited from your savings account into your mutual fund. Every month, you also put in Rs 1,000 in your Public Provident Fund account. The balance Rs 1,000 can be put in a recurring one year deposit. At the end of the tenure, when you get a principal of Rs 12,000, you can buy a National Savings Certificate.

But, if you just decide you are going to invest and don't decide how, you may end up putting the entire Rs 3,000 in a mutual fund. Or all of it in your PPF. Worse still, you may invest nowhere and just sit on your money wondering what to do with it.

Don't invest dumbly. Invest smartly and diversify.

Who does not want to be debt-free? To throw off all those loans and forget about the monthly payments and the stress that accompanies it. However, it requires planning to get there.

You have to look at all your loans and see if you have the funds to pre-pay a loan. If yes, which loan will you pick on?

Let's say you are repaying a personal loan and a housing loan. And now you have some money but are not sure which one to prepay. Don't prepay the housing loan. You get tax benefits on interest payment and principal repayment, which works to your benefit. You get no tax benefits on a personal loan.

The interest rate on a home loan will be much less than a personal loan which could vary from 14% (if your company has a tie-up with a bank or it is a promotion) to 21%.

So, it would make sense to pay off the more expensive loan first.

If it is a credit card loan, you will have to stop using the card so that all your additional purchases do not get caught in the interest cycle.

In such a situation, every month, instead of investing your savings, use them to pay off your credit card debt.

Every month, every spender will make a resolution to live within his or her means. Easier said than done.

A better way to do it is by specifying where you will cut down. For instance, I shall eat out only once a week and I shall visit the pub only twice a month is a great start for someone who splurges on the above.

Or, let's say, you have budgeted Rs 10,000 for monthly expenses. Of this, your essential expenses come to Rs 6,000 (cell phone bill, travelling, etc.)

You can keep limit of Rs 4,000 on your credit card. Once you touch this limit, you will not longer take your card out with you and stop all shopping and spending.

Do you have any goals that have helped you save? Or do you hate goals? Why don't you tell us about it?