Failing to plan is planning to fail. Managing one’s finances is no exception. All of us know that we have to retire some day. In spite of this, how many of us really prepare for this eventuality? Preparation does not mean arbitrarily salting something away for that rainy day. Even if you have been saving, along comes that foreign holiday you wanted to take or the car you yearned to possess, and there goes your piggy bank. You can always start saving from next month, right?
An early start
Actually, we are introduced to the concept and process of financial planning at a very young age—in fact, since our pocket money begins. I have fond memories of my week starting with pizzas, movies and soft drinks. As the weekend neared, vada pav substituted the pizza; one hung out outside the movie theatre instead of inside and the cola was swapped for a cutting chai. Of course, I felt a special thrill on the rare occasions where I actually managed to save some money.
In fact, it was with these savings that I made my first investment in a Recurring Deposit [RD] at a bank opposite my home. Bullying my parents, I managed to add two hundred rupees to my princely capital of INR 800 and was a delighted owner of a INR 1,000 bank deposit. It gave me a thrill to periodically visit the bank to add to the corpus and act grown up.
Looking back, the RD, proved to be great investment. Though the capital wouldn’t have made a Donald Trump look over his shoulders, the entire process instilled a discipline of savings at an early age. Not to mention the fact that I used the money to make my first foray into the stock market—100 shares of a company and my first investment as a professional. Thinking about this subject brings tears to my eyes, not on account of the nostalgia but because as a novice investor, I made the mistake of getting out of the stock way too early, just as soon as I had made a few bucks. Had I held on, perhaps Trump would have really had to look over his shoulders.
You need to plan your investments simply so you get rich before becoming old rather than getting old before becoming rich. Planning your investments carefully is the difference between building up capital and accumulating wealth. The difference between capital and wealth? Wealth is when your capital brings a smile to your face.
The good news, however, is that there is nothing esoteric about the financial planning process. There are no intricate spreadsheets that will tell you how much money you will have, up to the second decimal, on your 65th birthday. So, it’s so much better to have an objective blueprint in front of you.
How to plan
Start with the basics: what is the debt – equity mix you are comfortable with? This is the key starting point. Once you determine this ratio, you should also be determined to stick by it, no matter what. They say, discipline achieves what ambition seeks.
It takes all the restraint in the world not to withdraw from your PPF and get into equities. Similarly, it requires conviction and sometimes even a sleeping pill or two not to pull out of the market in a bear phase like the current one. However, once you get this thing sorted, you are on course.
The next step is to factor in and optimise risk, return, liquidity and tax-efficiency. If you need tax efficiency, you may have to sacrifice some liquidity, if you want more liquidity, you may have to scrounge on the return a bit. Each person’s life is different and the financial plan should be tailored to suit your unique situation. Therefore, it is best to have a goal-oriented approach as far as possible.
The numbers game
The next milestone is defining your objectives. For example, you wish to start a small business after retirement, your daughter wonders if you could lend a little financial support for her education abroad; you also want something in hand for her marriage and then there is this small row house at your native place that you always wanted to buy. The wants are many and all may not be fulfilled. The thing to do is to put it down on paper, in terms of cold numbers. This way, you graduate from a hazy idea of your requirement to a ball park figure.
The last step is completing the other side of the equation in terms of your net worth. Go ahead and list down your assets—things like a flat, car, family jewellery and investments. Be careful to deduct any liabilities in terms of loans that you may have taken [and may need]. The difference between the two is your target. If you think it is needed, by all means use the services of a professional financial advisor.
A continues process
Financial planning isn’t easy. Neither is it too difficult. The bottom line: chart your goals clearly, use the products available for maximum benefit and start early. They don’t say make hay while the sun shines for nothing. In addition, try and undertake periodical reviews. Financial planning is a constant and continuous process of knowing where you stand and what you have to do if you have strayed from the demarcated trail.
Lastly, use your investments to self-indulge. You only live once and what is the point if you can’t pamper yourself once in a while? For me this year, it was an iPod; a limited edition version with more gigabytes than I’ll ever have time to listen to. Perhaps I overdid it. But hey, if you have to do something wrong, at least do it right!
This was first published in the April 2009 issue of Complete Wellbeing.
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