Five reasons why it is important to set long-term financial goals

A well thought out financial strategy can be the difference between security and uncertainty in retirement

Everybody needs a financial plan, according to experts. Getty

It's often a misconception that short-term goals should take precedence over long-term objectives as it's difficult to predict the future.

Growing one's wealth is frequently challenging as income increases. The shopping list gets longer, the search for ideal holiday destinations fills your phone and many other "essential" things take priority over setting long-term financial goals.

A long-term financial goal is often something that is at least seven years in the future, and setting them can help you stay focused on your finances in general. As the saying goes, people don't plan to fail — they fail to plan.

Here are five reasons why setting long-term goals can help to set you on the path to financial freedom.

1. Financial security

Financial planning entails solving numerous problems, setting a savings plan and investing for the future.

A well thought out financial strategy can be the difference between financial security and uncertainty.

While some may believe that financial planning is reserved for the wealthy or the elderly, experts believe everyone needs one.

Long-term financial goals assist you in creating a safety net for your future.

There will be a variety of expenses in your life, such as retirement planning, emergencies, unforeseen life events, and so on. Thus, having a well-structured financial plan and judiciously adhering to it would provide a sense of financial freedom.

2. Taking advantage of the compounding effect

"Compound interest is the world's eighth wonder," Albert Einstein famously said. "He who comprehends it earns it. He who does not pay."

When considering long-term wealth generation plans, one must consider the benefits of compounding interest. It is the process of accumulating interest or growth on top of growth.

This can lead to the value of an investment to expand enormously over time. For example, if you put $100 in one year and it rises to $110 the next, your earnings the following year will be on top of the $110, not the original amount you put in.

If significant funds aren’t available for disposal, one can use a Systematic Investment Plan. A SIP is a disciplined investment approach in which a fixed amount of money is invested regularly.

Let’s suppose two individuals, Rick and Ben, start investing $1,000 per month until they are 65 years old.

Assuming an average annual return of 10 per cent, Rick starts investing at the age of 25, and Ben starts at the age of 45.

By the time Rick reaches 65, he would have accumulated $6.3 million, while Ben would have accumulated only $758,000; that’s the power of compounding returns!

Compounded growth can significantly improve returns over time with regular monitoring mechanisms in place. The longer an individual invests their money, the more significant the impact of compound interest will be.

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3. Avoiding debt traps

Debt can provide instant satisfaction for people who desire something they cannot afford, but it often comes with high interest rates and diminishes people's capacity to save and create healthy long-term plans.

On the other hand, debt is not always terrible; it may be managed by adopting some wise lifestyle choices and exercising some discipline.

Setting the correct financial goals requires making a budget, developing a debt payback plan and combining repayments with savings.

Setting realistic financial objectives and creating a plan to attain them can help you manage debt, save money and achieve long-term financial security.

4. Lifestyle design

Setting long-term financial goals allows you to construct the lifestyle you want.

Whether you want to travel, retire early, or pursue a particular hobby, having clear financial goals can help make them a reality.

A long-term financial plan helps to build realistic scenarios that help to highlight how long your existing financial portfolio would continue to achieve the lifestyle you seek and helps to adapt to fill in any gaps to aid you in accomplishing your goals.

5. Retirement planning

Financial independence in retirement is one of the crucial goals of having a long-term financial plan.

Thinking about life as a 70-something is one of the most challenging aspects of planning for retirement.

Many become so overwhelmed by the prospect of saving for an unknown future that they fail to save anything, which is the most catastrophic mistake one can make.

A well-structured financial plan enables you to begin saving early.

When you are young, you can start by investing in stocks or exchange-traded funds to get higher returns and, over time, you can increase your allocation to bonds or mutual funds to avoid volatility.

A well thought out plan and strict adherence can help you to maintain your preferred standard of living during your non-working years.

Financial planning is a continuous dedication to one's financial prosperity. If you're serious about meeting your objectives and making significant advancements, you should recognise that financial planning isn't a one-time event.

It takes continual upkeep and repair to ensure that you stay on track. Once you've created your financial plan, you must continue focusing on taking action and making developments to improve your circumstances.

Examining your plan and updating your financial profile frequently is generally recommended. A lot can change between when you create your financial plan and when you check in to ensure it is still accurate and aligned with your current lifestyle and goals.

Vijay Valecha is chief investment officer at Century Financial