1. THE NONSENSE OF SHORT TERM & LONG TERM FINANCIAL GOALS |
Posted: August 21, 2020 |
THE NONSENSE OF SHORT TERM & LONG TERM FINANCIAL GOALSDo you the single most important trait of a successful CFO? It is their ability to balance and fund the short term and long term goals of a company. Closer home we ourselves often the don the hat of CFO as we manage our cash flows. But, in reality there are often not known!! if you ask anyone they will be very quickly tell their top 3 short and long term goals. However, dig in deeper and almost all these goals would have elements of doubts and uncertainty, Unfortunately, we have been given a fair bit of Kool aid that most goals are certain and fixed. This naturally means that there are financial products to hit that goal which naturally means revenues for financial institutions. Time to relook at this understanding around Goals! Short Term GoalsLet’s start by looking at Short term goals. By nature these appear easy but our extremely hard to plan for. In fact, we argue that these even if you don’t have goals they will keep coming up . This happens as new new things keep happening in life and we rationalise them to be our goals. A few examples to illustrate this
The point we are trying to make is that the environment we live in things will keep changing and new things to do will keep coming up. And as you can see from the example above they are incredibly hard to plan for. So any financial tool which tells you about goals but doesn’t speak about these short term goals ( which will come even if you don’t want) is kind of meh!! So, how do we plan for short term goals? You Don’t!!Instead of planning for these goals, we need to be prepared for them. Few ways which you can be prepared for this is
The trick here is to always have source of funds which help you meet these goals without you touching your Long term investments. To continue with phone example, instead of break your Equity Mutual funs take the phone on no cost EMI using your credit card Long Term GoalsNow let’s go long. Long term goals are something which every single financial app, advisor agent, tool ask you to choose and plan for. The usual tenure for these goals is 10 years and beyond. We think that is dumb and outright wrong. Let me take a few examples to illustrate this Child Higher Education: This is my fav !! The biggest assumption is that a child will continue to study in same way as today and the teaching will keep getting expensive at certain rate. The COVID-19 though clearly tells us that both of them are completely wrong Starting a new Venture: This is factually incorrect. If you look at most start-ups you will find founders doing it cause they were passionate about it and thought it was right time to solve the problem. While have money helps, if you get a brilliant insight you won’t wait for 7 years to pool money and then go ahead. So what is a long term goal? Surely there has to one. There is and it is the only one. The only long term goal is wealth creation. Your wealth at any point determines the set of goals you will have. Example, if your wealth is say Rs. 30 lacs while you may plan to have a Jet after 30 years, the more realistic goal would be probably to do a real estate investment in next 5 years in a city like Mumbai. And therefore, the best way to achieve any long term goal is to delink your investments from goals !!
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