Categorise Financial Goals Into Short, Medium and Long-Term Goals, Prioritise and Achieve Them

Categorisation of Financial Goals

You can categorise financial goals based on the time horizon to achieve them. They can be divided into three categories as follows.

1) Short-Term Financial Goals

A financial goal where the time horizon to achieve it is less than three years can be categorised as a short-term financial goal. As the time horizon to achieve these goals is the lowest, they should be taken up on priority basis. Some examples of short-term financial goals include the following.

1. Building and maintaining an emergency fund
2. Buy term life insurance for the family income earners
3. Buying a comprehensive family floater health insurance plan
4. Repayment of high-cost debt like credit card outstanding and personal loans
5. Annual family vacation fund
6. Buying a two-wheeler, etc.

2) Medium-Term Financial Goals

A financial goal where the time horizon to achieve it is between three to seven years can be categorised as a medium-term financial goal. As the time horizon to achieve these goals is higher than short-term goals, they can be taken up once the short-term goals have been achieved. Some examples of medium-term financial goals include the following.

1. Accumulating a fund for a home purchase down payment
2. Building a fund for starting a business
3. Renovating the house
4. Buying a car
5. Building a fund for an international family vacation, etc.

3) Long-Term Financial Goals

A financial goal where the time horizon to achieve it is more than seven years can be categorised as a long-term financial goal. As the time horizon to achieve these goals is higher than short and medium-term goals, they can be taken up once the short and medium-term goals have been achieved. Some examples of long-term financial goals include the following.

1. Building a fund for a child’s higher education and marriage
2. Build a fund for own and spouse’s retirement
3. Repayment of home loan before schedule
4. Attaining financial freedom, etc.

Please note that for some people, the priority may be different. For example, we have mentioned ‘repayment of home loan before schedule’ as a long-term goal. However, someone may have taken a 10-year home loan and may be aiming to repay it in five years. In that case, it will be categorised as a medium-term financial goal rather than a long-term financial goal.

Similarly, we have categorised ‘renovating the house’ as a medium-term financial goal. However, someone may want to renovate the house in the next one year or so. In that case, it will be categorised as a short-term financial goal rather than a medium-term financial goal. Similarly, if someone wants to buy a luxury car, they may classify it as a long-term goal rather than a medium-term goal.

So, depending on the time horizon to achieve it, the same financial goal can either be a short, medium, or long-term goal for different individuals.

Prioritising Financial Goals

As discussed earlier, many people have limited financial resources. So, they can't start investing towards all financial goals at the same time. Hence, they have to prioritise them and start with short-term financial goals.

1) High-Cost Debt Repayment

If someone has high-cost debt in the form of credit card outstanding or personal loan(s), they may prioritise repaying it before investing towards financial goals. The interest rate on credit card outstanding is usually in the 3% to 3.5% per month range (36% to 42% per annum), which is very high.

2) Term Insurance and Health Insurance

Once the high-cost debt is repaid, you may buy term insurance for income earner(s) and health insurance for the entire family. In parallel, you may start working on building an emergency fund by setting aside some money every month. The emergency fund should be equivalent to 3 to 6 months of monthly expenses.

3) Other Short-Term Financial Goals

Once the term life insurance, health insurance and emergency fund are taken care of, you may look at the other short-term financial goals on your list. If possible, you may postpone short-term goals like 'fund for annual family vacation'. While it is a short-term goal, it may not be a priority. You may come back to it once your priority financial goals are taken care of.

4) Medium-Term Financial Goals

Once the short-term financial goals, which are a priority, are taken care of, you may shift focus to your medium-term financial goals. Since the time horizon for these goals is more than three years, you can work on all the medium-term goals together or prioritise among them based on your needs, financial resources, etc. 

Among medium-term financial goals, you may prioritise goals like house renovation, building a fund for starting a business, building a fund for a house purchase down payment, etc. Some medium-term goals, like buying a car, building a fund for an international family vacation, etc., may be taken up later once the priority goals are achieved.

5) Long-Term Financial Goals

Once the priority medium-term financial goals are achieved, you may shift focus to your long-term financial goals. Please note that long-term goals like building a fund for a child's higher education and retirement fund should be higher on the priority list and taken up as soon as possible. 

You may even start investing towards your long-term financial goals in parallel with your medium-term financial goals. Initially, along with medium-term financial goals, you can start investing a small amount towards long-term financial goals. With every year, as you near achieving your medium-term goals, you can increase the investments towards long-term financial goals annually.

6)  Investing Towards Lifestyle Goals

At a certain stage, your finances will reach a comfortable position, wherein you are investing the required amounts towards priority medium and long-term financial goals. At this stage, you can start investing towards lifestyle or aspirational or good to have financial goals. 

Some of these include building a fund for an annual domestic or international family vacation, upgrading your car, upgrading your mobile/laptop/other gadgets, etc. At this stage, you can accelerate the home loan repayment, make bigger investments towards achieving financial freedom, etc.

Categorise Your Financial Goals and Prioritise Them

An ideal situation for an individual is to have sufficient financial resources to invest towards all financial goals at the same time. However, the reality is different for many individuals. The financial goals list is long, and the financial resources for investment are limited. Hence, you should sit with an investment expert and list down all the financial goals. 

The investment expert can help you categorise them into short, medium, and long-term financial goals. They can help you prioritise your financial goals and start investing towards them. With time, as your income increases, you should be able to invest towards all your financial goals. Till then, prioritisation of financial goals based on time horizon and other factors can help you invest towards them and achieve them as per need. In your financial planning journey, as a reward for successfully achieving every short, medium, and long-term financial goal, treat yourself. It will keep you motivated to reach the next goal(s) till all the goals are achieved.