Financial Goals & Planning
The most common and persistent question of our life is “have we made adequate financial provisions to successfully meet our family responsibilities”. For a common man, the basic family responsibilities are education of kids, their marriage, making own house, buying a car, financial provisions for post-retirement life etc.
Financial goals are future targets driven by pre-determined future financial needs. It may be long-term goals, short-term goals and intermediate goals. The financial goals must be realistic, measurable and well calculated.
Financial Planning is a systematic approach to provide for financial goals so that people can fulfill their needs and aspirations. Financial Planning helps a person in ascertaining how much he should save, invest and which goals of his are not feasible.
Financial planning ensures that the investor takes the corrective action in a timely manner reviewing what a need is and what a desire is and if some desires can be postponed so that the most important needs are met first.
There are two approaches to financial planning, one is goal oriented. The other is Comprehensive Financial Planning.
- Goal Oriented financial planning is undertaken to find out how much money will be needed, when it will be needed to achieve a particular goal.
- In Comprehensive Financial plan, all the financial goals of a person are assessed together and then the investment strategies are developed.
Saving and Investment
Saving a piece of your earning is a prerequisite for wealth creation through investment.
Remember the great golden days of our childhood. The piggy bank (Gullak) was the most valuable companion of most of us. In that clay made piggy we used to put whatever money we get on different occasions from elders as a token of blessings. All the brothers and sisters together used to prove that my piggy bank is more filled than yours. It was decided by the weight of the piggy bank whose piggy bank has more money. We used to buy things of our choice with the money saved. Our parents always appreciate this habit of saving.
Clay made Gullaks have converted into digital piggy boxes with the passage of time. But the way to inculcate the habit of saving money among children by their parents is still same with some modification. This modification refers to giving opportunity to your savings to grow through investing it smartly at an early age.
A simple fact of our society is that when we start earning, we forget the savings habit that our parents instilled in us. Even though we understand the importance of saving, we keep overlooking & postponing it for the coming years.
Now, when you do not have any savings, obviously there will be no investment. And for as many years as this cycle continues, you will be left behind from the process of wealth creation.
Simultaneously, as early as you start saving and investing some amount from your monthly earnings, proportionately you will make yourself free from future financial insecurities.
A simple fact: If a person started investing Rs 5000 per month at an expected yearly return of 12% at the age of 25, The accumulated sum at the age of 50 will be around 1 crore.
Saving a piece of your earning is a prerequisite for wealth creation through investment. Savings and investments are two different but interrelated activities and can be defined as below
- Savings refers to the amount left over after an individual’s consumer spending is subtracted from the amount of disposable income earned in a given period of time. Savings can be used to increase income through investing.
- Investing is the process of using the saved money to earn for you an acceptable return over a time-period. This includes Term Deposits, stocks, bonds, Mutual Fund units and other financial products. Right investment gives us opportunity to grow our savings over a period of time.
Both Investing and saving activity is derived from putting away the surplus money for future financial security. But only saving money is not sufficient for future financial security.
Suppose you are saving Rs 10,000 per month from your monthly income and keeping it in a locker. After five year your saving will be Rs 6,00,000. Now consider the inflation effect on the saved money. Does the purchasing capacity of the saved money will remain same after five years? Certainly, the value of money will get decreased. Inflation will wear down the value of your saved money year by year.
Although you saved for 5 consecutive years with full discipline, but decisively the value of your savings has declined in tune of the inflation.
Why this has happened?
It is because you did not place your savings at a right destination where it can grow significantly.
You did not provide the opportunity for your savings to grow. You ignored the prospects of investment.
Let us flip this example. You started saving Rs 10,000 per month and invested it in a SIP (Systematic Investment Plan) of a good mutual fund scheme. You continued this investment for five years. Your total investment on completion of five years is Rs 6,00,000. On an average if we consider the rate of return on this investment @ 10%, total accumulated amount will be around 7,80,000. This clearly reflects that your money earned Rs 1,80,000 in five years over your investment.
So, now it is clear that only saving is not sufficient. Smart investing of this saving is the necessary step to give opportunity of growth to your savings.
Purpose of investment is not to make financial provisions for survival on a day-to-day basis. It is often needed to achieve the financial goals like education of children, their marriage, buying own house, retired life financial provisions etc.
The bottom line:
Consider the following scenarios
|Savings per year||Kept at home in cash||Invested in a financial product|
|Real rate of return||(-)4%||0.06|
|Impact||Value of money decreased by 4%. Now the effective value of money is Rs 96000||Value of money increased by 10%. But the effective value of money is valued after deducting the inflation. So, the effective value will increase by 6%. The accumulated money is 110000 but the effective value of money is Rs 106000|
|Results||Negative return||Positive return|
A common social trend
Despite the investment opportunities being the same for men and women, it is found that the women are relatively conservative in their investment approach. Ladies in Indian society normally do not indulge themselves in investment related activities whether she is a home maker or working lady. This phenomenon of our society is prevalent because of insufficient exposure and lack of awareness among them. Equality of women and men in true sense can be established if women participate actively in investment activities and also understand the procedure of investing in different financial products, their suitability with them in terms of safety, Liquidity & Returns.
Start saving from day one as you start earning. Invest it wisely to get good appreciation on your savings. Housewives/ Working ladies participate actively in saving & investment activities with their husband.
Why you should Invest
I was chatting with my wife in the lawn of our newly built house when the bell rang. My colleague Sharma with his family had come to see our new house. We showed them our house with pleasure. As a normal courtesy, we sat back on the lawn and started drinking tea.
Sharma ji praised the house with an open mind and started asking about the expenses incurred in building the house. During this period of conversation, Mrs. Sharma said, “The happiness of our own house is not written in our destiny.”
I replied “Why are you saying this Mrs. Sharma. You have already purchased the land, get your house built on it as soon as possible.”
Mrs. Sharma said hesitantly, “initially we did not pay attention on creating financial provisions for making our own house. Now there are only a few years left in the retirement of Sharma ji. All the responsibilities like marriage of daughter; higher education of younger son is still need to be completed in couple of years. How we will be able to get a house built?
Sharma ji also supported her and said, “How do you fulfill all your responsibilities so well.”
“Look Sharma ji, I also work with you on almost equal pay. It is also true that I am fulfilling all my family responsibilities without any financial stress. But there is no rocket science behind it.
I started saving money from day one I started earning and wisely invested my savings to meet my future financial goals.
I did it with a strict discipline and this has made my life free from financial stress.
A look of confusion appeared on Sharma’s face. He asked, “What do you mean by financial planning, I also earn equal to you.”
This story of two people with same socio-economic background indicates clearly why one should save and invest their money at an early stage. To end up where you want to be, depends upon making and following an appropriate roadmap of your financial planning. Therefore, we should invest our savings because:
- It gives opportunity to grow your money based on your personal tolerance of risk.
- Investment can earn higher returns than keeping your money in bank saving account
- You can accumulate the required amount for your future financial goals by making a suitable investment portfolio.
- It can help you in your Tax planning.
Why you should Invest?
Simple one line answer – To create wealth and to achieve your financial goals.