Tuesday, February 15, 2011

Plan for a Better Future

Planning for the future is something that we have learnt ever since we were kids. The story of the hard working Ant and the lazy Grasshopper was taught to us when we were in school. We were told that the Ant worked hard and saved food to help itself during the winter while the grasshopper enjoyed during summer and starved during winter.

I guess you are getting a fair idea of what I am going to tell you in this article. Yes, it is about planning for a better future. We all study hard with the aim of getting a nice paying job. Because, without a job you cannot get married, without marriage you cant have kids and so on and so forth. So, in order to settle down in life, we need money and I mean a lot of it. Am not trying to be boastful or pessimistic here, but the fact is, money has become one of the most important aspect of an individuals life (second only to love and family)

Every individual who is in a job and is earning, needs to plan for his financial future. Things like, marriage, childrens education, retirement are in the back of all our minds. This article is about planning our future in a way that would benefit us in the long run.

Lets get started!!!

The following section will have 3 items:
1. Step – The activity under consideration
2. TODO – What we must do

Step 1: Assess your financial health

Before we start charting out a plan for our financial well-being, it is most important to assess our current financial health. It would give us a good idea of where we stand and what needs to be done to reach the place we intend on being. Not all of us have a father who is a TATA or an Ambani. We are all sons and daughters of hard working middle class individuals who have struggled all their lives to give us a better education and eventually a better life. So the onus is on us to make sure that we make the most of it.

TODO: Analyze your savings, loan commitments, investments etc and figure out your current financial status. For ex:

Savings in Bank: Rs. 1,00,000/-
Stock Market Investments: Rs. 5,00,000/-
Car Loan: (-) Rs. 3,00,000/-
Home Loan: (-) Rs. 25,00,000/-
Annual Salary: Rs. 7,50,000/-

If you see the example above, the current status of this individual is pretty grim because he has loan commitments worth 28 lacs and has an annual income of 7.5 lacs and has investments worth 6 lacs. Even if he happens to use all his savings and all his income to pay off the loans, he will need 3 years to do that. This isn’t so nice is it?

Step 2: Identify your goals

The next step to a better financial future is to identify our goals. It could be like “I wanna buy a BMW in 2015” or “I want my son to study in Harvard” etc. It is just what our goal is. As expected, the goal involves a certain amount of money.

TODO: List out your goals one after the other and assign a rough value against it which we must save within the specified time frame in order to achieve our goal.


Buy a Car in 2015 – Amount Required: Rs. 5,00,000/-
Daughters Marriage in 2025 – Amount Required: Rs. 10,00,000/-
Sons education in Harvard starting 2020 – Amount Required: Rs. 25,00,000/-

This would give us a fair idea of how money we need for our future goals.

Step 3: Design a Plan

This is probably the most important aspect of them all. Based on our goals and the timeframe we need to come up with a plan using all our available resources.

TODO: Calculate the amount required for each goal and figure out, how much you can spare to save/invest every month in order to achieve that goal.

For ex: Goal – Buy a car in 2015 – Rs. 5,00,000/-

As of today (Feb 2011) there are still almost a full 4 years till the target date of 2015. so if we manage to save Rs. 1.25 lacs every year, in 4 years we will have 5 lacs to buy our dream car. 1.25 lacs every year equals Rs. 10,000/- every month.

So, to achieve this goal, I would have to invest Rs. 10,000/- every month (in some sort of savings scheme, it could be stocks, bank deposits, gold etc etc) for the next 4 years and I will have 5 lacs to buy my car in 2015

Step 4: Execute the Plan

Do I have to say that, this is the hardest part of the plan? Planning to invest a certain amount every month is easy, executing it is extremely difficult. It is our duty to stick to the plan we formulated in step 3 and execute it properly.

TODO: Make sure you spare enough money to meet the plan designed in step 3 every month.

Alert: It is easy to skip the plan when you need some extra cash due to some unexpected situations. I repeat, it is very easy. But if we happen to do that, we will not be reaching our goal. So it is important that we stick to the plan as best as we can.

Step 5: Review the Plan

Every year, as our income and expenditure goes up, we need to review our plan. A plan for a better financial future is not a one time activity. We need to review it yearly and make sure we accommodate the change in value of our goals.

TODO: Check out the cost associated with each of your goals and maybe include new goals into your list or remove completed goals from the list every year. Make sure you make changes to the investment plans to adjust for the new entries added or existing entries removed/modified.

A car that you planned to buy in 2015 which was Rs. 5 lacs today may be 6 lacs in 2014. So, the rate at which you are saving every month wouldn’t be enough to buy your car. So in 2014, when you review your plan, you must accommodate the increased cost and adjust your savings in a way that you will end up with 6 lacs in 2015 and meet your goal.

To wrap up, let me say that financial planning is very important and every individual who wants a good financial future must take some time to chart out a financial plan for themselves.

All the very best and Happy Investing!!!

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