Along with New Year comes new resolution and new goals. Goals can vary from the simplest of targets like working out everyday or eating healthy food to significant ones such as becoming financially disciplined.
However, we really do not have to wait for a new year to pursue any goals. In fact, the earlier we start better it is, especially when it is about setting financial goals.
In the subsequent paragraphs we will discuss three most common and essential goals people have and ways to achieve it.
One of the major financial goals is retirement planning. Proper and calculated financial planning is extremely essential in order to remain financially secured and maintain a comfortable standard of living in the later years of life. However, people often fail to do so.
The phase of life in which one earns is limited and we have to accumulate enough wealth to support life’s sunset years. A key risk involved during old age is increasing medical expenses. Needless to say, one has to have enough finances in order to address medical emergencies.
Retirement planning involves accumulating a corpus that will provide an income after one ceases to earn professionally. The corpus should be such that it provides for expenses overcoming inflation. Therefore, the earlier we start, lesser will be the monthly contribution. An illustration of the same is given below.
So the key rule is to start early, invest regularly and consistently. If we start early, we can safely go for equity-based investments, which can fetch good return over time. As we move closer to retirement stage we have to safeguard our investment and hence we shall go for less risky debt instruments.
The second goal usually happens to be child’s higher education. Two important things to be considered in this case are inflation and depreciation of currency, espcially if one plans to study abroad. Education loans are expensive and education inflation is currently estimated around 8.5 per cent. Given such scenario, an undergraduate or postgraduate course that costs Rs.5 lakh today will cost approximately Rs.25,56,000 in 20 years. Monthly investment of mere Rs. 3,133 at 11 per cent annual returns can give this required fund in 20 years time. One can safely go for an equity-based instrument in such a case.
However as we delay, the monthly investment amount required will go up. We may also need to opt for a safer investment tool when we have only short term to achieve the goal. The returns also will be lesser for such safer instruments. For the same scenario mentioned earlier, if one starts investing just five years prior to the goal in a debt instrument that fetches 7 per cent annual returns, monthly investment required will go up very high to approximately Rs. 35,700.
Starting early by way of monthly SIP will help accumulate the necessary fund. Depending upon the tenure, one may choose a suitable investment instrument to get better post-tax returns.
The third goal (though it holds less signifcance) is travelling. With millennials growing in number, the way Indians travel has transformed substantially. International travel is a common phenomenon with today’s generation. However, its expenses cannot be denied. Since it is a luxury goal, there is flexibility to change its tenure to create a fund. It can be done in two ways.
A lumpsum investment of approximately Rs.16,66,000 at 6 per cent annual returns will give an annual cash flow of Rs. 1,00,000 every year without affecting the principal. But this may not be possible for every one.
Monthly investments are also good to create a fund for travels. However, since such goals are short term, safer investment tools are the best bet. One can accumulate an amount of Rs. 200,000 by investing Rs. 5000 monthly for three years in a financial tool that gives 7 per cent annual returns. They can also opt for a higher return investment tool with slightly higher risk, which may help achieve the goal faster. In a rare event of falling short of goal value, they can just postpone the goal for a year, as this is not mandatory.
The best way to plan your finances and thereby achieve all your goals, is to seek help of a certified financial planner. Such a professional will be able to guide you properly in terms of planning your finances, thereby realise all your goals.
First published in Outlook Money.