Financial planning may sound esoteric. In reality, it is nothing but arranging your finances in light of your future goals. Your children may aspire to study abroad, you may want to buy a bigger house or car, or go on a holiday abroad.then there is the universal need of having enough savings for your retired life. To achieve all of this, you need to plan your actions, especially the ones with financial implications.
A goal-oriented approach will ensure that you achieve your objectives without having to compromise on your standard of living or in the worst case, some of your goals. Therefore, put everything down on paper, in terms of cold numbers. This gives you a broad ballpark figure about your requirements. Also, quantifying clarifies the picture by removing any subjectivity.
Let's take the typical example of a working couple to see how financial planning helps meet objectives. Mr and Mrs Mehta are both in their mid 30s and have a 3-year-old daughter, Mala. Together they earn a lakh a month. After subtracting all the expenses including the EMI for their house, they together manage to save around Rs 26,000 per month. Mrs Mehta has Rs 6 lakh in her PPF account, which will mature this year. The couple also has some post office investments and fixed deposits worth Rs 5 lakh. They have a portfolio of mutual funds amounting to Rs 3.40 lakh. They also have a running SIP of Rs 5,000. Lastly, their combined provident fund balance is Rs 11.50 lakh with the monthly PF deduction being Rs 10,000 per month. Given this background, their key goals are to provide for the education and marriage of their daughter. They would like to keep aside over Rs 25 lakh for Mala's higher education. They want to collect gold for her wedding. They also want to buy a sedan worth Rs 8 lakh. They also want to provide for retirement.
Let's help the Mehtas provide for their stated goals.
Since the first and foremost priority for the Mehta's is to provide for Mala's education, I suggest they start a PPF account in her name. Since she is three years old, ordinarily the need for funding her higher education will arise in another 18 – 20 years. For this purpose, they can put away a sum of Rs 70,000 per annum or Rs 5,800 per month in the PPF account. This money can come from the Mehtas' monthly surplus [mentioned above]. This would ensure that they have an assured and guaranteed sum of Rs 32 lakh by the time Mala grows up and requires the money. Note that no child plan or any other investment can offer you such a high guaranteed amount.
Saving for marriage
The next need in the order of priority is provisioning for gold for Mala's marriage. Here, we assume that she will marry around the age of 26 years, in about 23 years. For this purpose, I suggest the Mehtas buy 1 unit [equivalent to 1g] of gold per month. They can do this by investing in a Gold ETF [Exchange Traded Fund]. A unit per month over 276 months [23 years] works out to 276g or approximately 28 tolas. An ETF is one of the most efficient methods of buying gold. The investor is assured of the quality of the metal and does not have to worry about the risk of storage and theft. The funds required for this [around Rs 1,400 per month at current prices] can come out of the balance monthly surplus of Rs 20,200 [after accounting for PPF]. The balance of the surplus will go towards retirement planning as discussed later on.
The vehicle is expected to cost around Rs 8 lakh. For this, the Mehtas could use money from Mrs Mehta's PPF account that is due to mature shortly to partly defray the cost of the car. The balance money required can come from their post office investments.
We assume that the couple will work until 58 years of age, which means both have around 20 years left for retirement. Their current PF balance [combined] is Rs 11.50 lakh. Their monthly PF contribution as stated is Rs 10,000 per month. The maturity value of this amount at the current PF interest rate of 8.5 per cent per annum over the next 20 years works out to Rs 1.25 crore. Additionally, their current investment in equity and mutual funds is around Rs 3.40 lakh as lump sum and Rs 5,000 as SIP. Furthermore, out of the balance monthly surplus, Rs 10,000 be earmarked for retirement by way of investing in quality mutual funds on an SIP basis. At a very conservative rate of 15 per cent per annum, the total amount [current as well as the suggested SIP] would grow over the next 20 years to around Rs 2.92 crore.
This way, the combined retirement proceeds including the PF money would work out to Rs 4.17 crore. [Rs 2.92 crores from mutual funds + Rs 1.25 crore from PF]
Pension helps take care of day-to-day needs. They can invest the retirement fund either risk free at 9 per cent per annum, or in mutual funds at15 per cent per annum. At the risk-free rate of 9 per cent per annum [say in a bank fixed deposit], the Mehtas will receive a cheque of Rs 3.32 lakh per month. At 15 per cent per annum, they would get Rs 5.26 lakh per month. Ideally, they should invest the money in both risk-free deposits and mutual funds.
Though the Mehtas haven't specifically mentioned this, a prudent financial planner would always provide for a certain amount of money that is liquid and readily available for unforeseen emergencies. For this, we advise the Mehtas to put the balance Rs 9,000 from the monthly savings into a recurring deposit. This way, the emergency fund, till such time it is used, earns enough at least to cover inflation.
One last step
Planning for the future is not a one- time exercise, it's rather a constant, continuous process of knowing where you stand and what to do in case you stray from the demarcated trail. The only thing constant in life is change and it follows that your goals, purposes, intent or for that matter life itself, changes with the events that happen. Therefore, review your financial plan every year and monitor your progress.
Financial planning is not changing your current investment instruments or structures. It is using the same instruments in a systematic goal-oriented manner. Therefore, you may use various mutual fund schemes, bonds, fixed deposits or small saving schemes for your aim. How best to use these tools can be worked upon, if needed, with the help of a professional financial planner. However, it is never a good idea to depend entirely upon someone else. Start drawing your own map, and go to the professional only for the fine-tuning.
It's never too early nor too late to begin your financial planning exercise. Yes, it will not happen overnight and it will take hard work, attention and time from you. But the key is to start. If you have not already, do so now!
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