Being SMART in Financial Terms

We all have financial goals - even if we don't really think of them as goals per se.
For example, you might want to buy a new cell phone, or a new car. You might want to take a family vacation next year, or renovate your home.
Some people prefer to keep it simple when they think of goals.
They want to become rich. That's it, in a nutshell.
If you think about it, being wealthy, or wealthier than you are today, would enable you to do all those other things easily.

So, would you say that becoming wealthy is your main financial goal?

If your main financial goal is to become rich, studies show that most likely, you won't achieve it.
Why is this? Because as goals go, 'becoming rich' is not a S.M.A.R.T. financial goal.
Let's see what this means.

1.      Is it Specific?

'Becoming rich' isn't a goal. It's a desire, or a wish.
For a goal to be powerful, and more importantly, achievable, it needs to have certain characteristics. For starters, it should be Specific.

The "W" questions will help you be specific when you set your goals.

a.       Who is the goal for?

b.      Why do you want to achieve this goal i.e. benefits, reasons, purpose behind the goal?

c.       What do you want to achieve exactly?

d.      When will the goal occur?

e.       Which are the requirements and constraints?

For example, a vague goal would be 'Become rich'.
A specific goal would be 'Increase investments by Rs. 50,000 p.m. to have a portfolio of Rs. 2 crore within 15 years'.

2.      Is it Measurable?

When you set a goal, and you start working towards achieving it, it'll always make you feel good to see how much you've accomplished. If you set a target and have a time-line, you'll be able to monitor your progress and give yourself a pat on the back at every milestone passed. With every piece of your goal successfully achieved, you'll be spurred on to do even better.

Think of it this way: you wouldn't go on a vacation without planning ahead and having a to-do list. You'd check items off the list one by one once they were finished. So adopt the same approach with achieving your financial goals.
Suppose you are saving up for a family vacation, and you figured that you need to save Rs. 10,000 per month for 12 months to go on that vacation next September. Your goal is measurable. Each month you will be able to see what you have saved, whether you need to increase your savings, or you can relax a bit and treat yourself for extra savings done ahead of time.

Just remember, the more specific the goal, the easier it is to measure.

3.      Is it Adjustable?

Often people make the mistake of setting goals that are too rigid, where any unforeseen event can throw the goal off course and destroy the goal achiever's motivation to keep going. This is a mistake. And also, simply unnecessary.

Goals are not meant to be win or lose situations. Goals are just goals. You can achieve them 100%, or 85% or 50%. You can achieve them early, or late, or if things go exactly according to plan - right on time.

The main thing to remember is that you are working towards something, and other things can get in the way, or can help you along, and you needn't stress about it.

For example, you might have started saving for your retirement, when a recession hit and you lost your job. This has caused you to deplete your contingency reserve and dip into your retirement funds to meet expenses until you get another job. This is obviously not ideal, but worrying about not achieving your retirement goal on time will get you nowhere. When you get another job, you will build up your retirement savings again. You may need to adjust your retirement goal corpus or time-line, but that's alright because your goal is adjustable, as all goals should be.

4.      Is it Realistic?

If you ask a 5 year old what they want to be when they grow up, you'll get a response like 'an astronaut', or 'a princess'. If you ask a 10 year old, you might hear 'a doctor', or 'an engineer'. As a 30 year old, you might still harbor a secret wish to walk on the moon, but this is not very realistic.

We're an achieving generation. We want to take care of our families, to do well in our careers, to have fun, to travel. We want to buy the new car, wear the new watch, check out the new holiday destination.

But while we can be specific about all these things, and make them all measurable and adjustable, is it realistic to say you want to achieve all this and then some?

Let your list of financial goals be realistic. If you set up a financial goal list that is basically a list of all your heart's desires, you might be disappointed if things don't seem achievable.

Have your priorities, know your capabilities, and stretch yourself a little bit to get that extra edge.
But remember, don't take risks where you can't afford to, and don't set yourself up for disappointment. And most importantly remember that money is a means to an end, not an end in itself.

5.      Is it Time-based?

Setting a specific, adjustable, realistic goal is great, but without a time-line, it can be difficult to measure. Saying "I want to buy a new car" is not really time-based.
Saying "I want to buy a new car worth Rs. 6 lakhs in 18 months" is time based and much more measurable. Figuring out how much to save each month and how much of a loan you'll need becomes a simple math problem, and the likelihood of buying your new car in 18 months goes up drastically.
With no time frame, there's no sense of urgency, or yardstick to measure your progress.

Conclusion

The process of setting your goals is an exercise that will give you incredible insight into yourself and the things you value. You'll be able to see your aspirations take shape, become specific intentions that you will be able to take steps towards. Setting S.M.A.R.T goals will help you distinguish real wants and needs from daydreams.

Goals can act like a map and like a conscience. The next time you're in a technology store or a clothes boutique considering that purchase, you'll think of whether this fits in with your savings plan for the month, and whether it brings your goal closer or not. You can then make your decision with full financial awareness. 

Contributed By:

Ankur Duggar

S&P cuts Italy ratings one notch to A/A-1, outlook negative

Standard and Poor's downgraded its unsolicited ratingson Italy by one notch to A/A-1 and kept its outlook on negative, a major surprise that threatens to add to concerns of contagion in the debt-stressed euro zone. 

The single currency skidded over half a cent to $1.3606 after S&P said the cut reflected its view of Italy's weakening economic growth prospects. 

Italy's fragile governing coalition and policy differences within parliament will likely limit the government's ability to respond decisively to the challenging domestic and external macroeconomic environment, the agency said.

"In our opinion, the measures included in and the implementation timeline of Italy's National Reform Plan will likely do little to boost Italy's economic performance, particularly against the backdrop of tightening financial conditions and the government's fiscal austerity program," said S&P. 

The move from S&P came as a surprise as the market had thought Moody's was more likely to downgrade Italy first. Moody's last week said it would take another month to decide on its action. 

The downgrade came as Greece struggles to meet demands from lenders for yet more austerity measures.

"It's just more of the same negative news," said Stephen Roberts, a senior economist at Nomura in Sydney. 

"It only adds to the contagion risk over Greece and has encouraged the flight to safety in markets here," he added, pointing to a sharp fall in the Australian dollar on the news. 

S&P 500 futures also dropped 0.7 percent and early hopes for a bounce in Asian shares on Tuesday looked to be still-born now. 

European stocks had already slid on Monday, while yields on Italian and Spanish bonds rose sharply on fears of a Greek default, compounded by the failure of EU finance ministers to agree new steps to resolve Europe's debt crisis at weekend talks. 

International lenders told Greece on Monday it must shrink its public sector and improve tax collection to avoid running out of money within weeks as investors spooked by political setbacks in Europe dumped risky euro zone assets.

RBI hikes repo, reverse repo rates by 25 bps; loans to get costlier

India's central bank raised interest rates on Friday for the 12th time in 18 months and said it will persist with its anti-inflationary policy stance, even as growth slows in Asia's third-largest economy. 

The repo rate, or the interest the central bank levies on short-term borrowing by commercial banks, has been raised to 8.25 percent from 8 percent. Automatically, the reverse repo rate, or interest on short-term lending, gets hiked to 7.25 percent from 7 percent. 

The central bank said it was too soon to ease back from its anti-inflationary bias, setting the stage for auto, housing and commercial loans to become dearer once again. 

Commercial banks are widely expected to pass on the interest rate burden to customers, which could made consumer and corporate loans dearer, even while raising the interest outgo on existing loans, along with a longer tenure for repayment. 

"A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance," it said in a statement. 

The RBI's hawkishness, which saw it raise rates by an unexpectedly steep 50 basis points in late July, increasingly jars with dovish talk from central bankers worried about the health of the global economy, with both the United States and euro zone weighed down by debt problems. 

It also sets India apart from its Asian neighbours, which have recently rolled back rate hike campaigns. 

Headline inflation for August rose to 9.78 percent, data on Wednesday showed, its highest level in more than a year. 

India's economic growth has cooled and demand crimped following the cumulative impact of earlier rate increases and rising prices. 

"RBI is still viewing rising inflationary expectation as a key risk after a series of 12 rate hikes. This, according to me, 

is a real worry so far as rate outlook is concerned," said Nitesh Ranjan, chief economist at Union Bank in Mumbai. 

The benchmark 10-year bond yield rose 4 basis points after the central bank kept up its hawkish tone, while the one-year swap rate surged 11 basis points. Shares too trimmed gains to be up just about 0.4 percent from 1.4 percent before the announcement. 

While inflation in India was initially driven by food and fuel prices, both largely beyond the scope of monetary policy, it has spread to the core non-food manufacturing sector and remains far above the central bank's perceived comfort zone of 4 to 4.5 percent. 

Most economists in a poll released on Monday expected the central bank to raise rates on Friday and then pause in a tightening cycle that has made RBI Gov. Duvvuri Subbarao one of the most aggressive central bankers anywhere over the past two years. 

Industrial output in July was the weakest in nearly two years, while India's June-quarter economic growth of 7.7 percent was the slowest in six quarters. 

The rupee, which plunged to a near two-year low against the U.S. dollar on Wednesday, may further weaken on the rate rise, hitting India's import bill.

Double Dip Recession

Are we heading to a second dip in the economy. As per reports, US may face double dip recession and Eurozone may collapse.

Is the gold market getting overheated?

Gold has turned into an attractive investment option in the aftermath of delivering a spectacular rate of return last year. The investment demand for the yellow metal has been growing at a fast clip in countries like India and China. So, is the gold market overheated? K P Padmakumar, executive director, Muthoot Finance Ltd, does not think so. However, he is of the view that investors shouldn't put all their eggs in one basket.

Padmakumar, former chairman of Federal Bank and a former fund manager of SBI Fund Management, spoke to ET about the factors that triggered the gold price boom, apart from providing new insights to understand the price behaviour. Apart from the higher demand from India and China, the two leading Asian economies, pronounced signs of structural weakness in Europe, even in countries like Italy and France, have fuelled the gold price rally. The unemployment rate in the US is still uncomfortably high and the economy is still not out of recession. The structural weakness of these economies has weakened the position of the dollar as a reserve currency. All these factors have pushed up the price of gold, says Padmakumar.

"On the other hand, the supply of gold is static. No new mines are being added, making the cost of prospecting for gold prohibitively high. The increasing production cost, on the one hand, and the growing demand, on the other, have contributed to this price rise. Interestingly, China might soon overtake India in terms of private gold consumption." With prices and demand at a high, isn't the gold market getting overheated? Padmakumar doesn't think so. After taking cognisance of the factors that have triggered the price rise, he opines that gold as a market is not yet overheated.

There are many reasons for taking such a view. The structural weakness of many economies in the West is still a cause for worry. The debt-to-GDP ratio is worsening in many of these countries. And though the position of the dollar has weakened, there are no signs of an alternative reserve currency in the near term. "All these factors point to the primacy of gold as a preferred asset class. As a result, a precipitous fall in gold prices may not happen in the short to medium term. However, since speculative demand for the commodity has increased, temporary ups and downs will happen, as is being demonstrated in the recent weeks.

But the underlying trend will show an upward movement in prices as the structural asymmetries in leading economies in the world are still at large. Gold prices stood at $800 per troy ounce in 1980. The price, after adjusting for inflation, should be around $2,400 per troy ounce at present. Going by the present trend, this price is likely to be discovered by the middle of next year," he says.

Now, pre-pay your home and car loans without penalty

Pre-payment penalty on floating rate loans, be it for a home or a car, is set to come to an end, bringing relief to lakhs of customers who are forced by banks to pay as high as 3% of the outstanding loan amount when they seek to end indebtedness.

"Banks must not recover pre-payment charges in floating rate loans," the Reserve Bank of India said in a statement on the proceedings of Banking Ombudsman Conference.

"Floating rate loans pass on the interest rate risk from banks, which are much better placed to manage it. Banks only substitute interest rate risk with potential credit risk."

The levy of pre-payment penalty by banks has been criticised by consumer groups and the regulator, since it deprives an individual the choice to end the debt burden. Banks have been using it to prevent customers from shifting loyalty and manage their asset-liability gaps.

A committee headed by former Securities and Exchange Board of India chairman M Damodaran had suggested actions to improve customer service, including a ban on the practice.

"RBI's decision is a very good thing since it will encourage people to settle their outstanding loans faster," said Jehangir Gai, joint secretary, Consumer Welfare Association in Mumbai. "It is usually a hidden charge and banks do not disclose it to the consumer. When the consumer goes to close a loan, banks spring this charge as a surprise.''

The annual Banking Ombudsman Conference also directed banks to come with a consensus view on the recommendations of the panel that could be implemented immediately. The Ombudsman scheme was introduced in 1995 to settle consumer disputes quickly in an inexpensive way.

BANKS SHOULD PROVE INNOCENCE

"Banks should not impose exorbitant penal rates towards foreclosure of home loans and a policy should be devised to ensure that the customer is not denied the opportunity to enhance his economic welfare by making choices such as switching to other banks/financial entities to enjoy the benefits conferred by market competition," the Damodaran committee said.

The Ombudsman conference also decided that banks will have to prove that the fault is not theirs in disputes over automated teller machines and internet transactions. RBI will consider whether a customer is to be compensated for the agony suffered during a dispute.

Other recommendations of the Damodaran committee include an end to discrimination among retail borrowers, uniform charge for mortgages with similar risk profile, and not penalising those presenting a cheque in case it bounces, but compensating them in the event of wrong returns.

Regulation FD

SEC regulation adopted in 2000 that eliminated the practice of selective disclosure. The rule requires that when a public company chooses to release any information, it must be done in such a way that the general public has access to it at the same time as institutional investors and analysts. If information is accidentally released to specific parties, the company must disseminate that information widely within 24 hours.