Mistakenly people often approach financial planning as a forward looking task, when in reality it is backward looking from the 'goal' you want to attain after certain years.
This 'goal' is nothing but the sum of money you will need. It can be anything, few examples are:
- Rs. 10 lakhs for marriage in 3 years - Rs. 40 lakhs to buy a house in 7 years
- Rs. 5 lakhs to buy a car in 1 year
- Rs. 6 lakhs as emergency fund by 3 years
- Rs. 60 lakhs in 35 years for retirement
- Rs. 3 lakhs for foreign vacation after 2 years
The amount, purpose, timeline are all in your hands. You begin with jotting down everything you think you need, want and desire then categorise them accordingly.
Now that you have a rough estimate of the amount you may require based on the list above, visualise it as the 'goal' and look back to where you are today financially.
Now, identify what you lack and plan towards filling that gap from the present day onwards. The input variables needed to formulate a good financial equation (the variables together are referred to as the plan) are:
On the RIGHT HAND SIDE (RHS): 1. The amount (X) you need after years (n)
On the LEFT HAND SIDE (LHS): 2. Your saving capacity (Y) 3. The return on investment (r)
4. The number of years. (N)
RHS=LHS
X= Y*(1+r)^(n)
{X is equal to Y multiplied by 1 plus r raised to the power n} (- yes, math lesson flashback)
Each of these variables need considerable work and thought for the RHS and LHS to balance.
Like savings- if you're not disciplined with regards to savings, start here. You know your income and expenses or atleast have a rough estimate of the expenses each month. If you feel your savings are too less, you can take your credit card statement and strike out the expenses you could have avoided, then reduce that wasted expense by 25% every month for a smooth transition to better a more disciplined approach to your financial life. Give yourself 4-6 months to achieve this mini goal of savings per month.
Return on investment- On the basis your risk appetite (you'll need profesional help here if you're unsure of your risk appetite) choose your ROI. Now simply grow the savings every month at a compounded rate. Use Microsoft office excel. The resultant matrix will give you the desired information. If you're unsure of how to proceed- again, take professional help.
If you see that your final amount on RHS of the equation is lesser than LHS then you need to tweak your inputs by doing one, few or all of the following:
- Increase your saving per month
- Increase your ROI
- Decrease your RHS by eliminating the desires and then wants. This may seem a difficult and strenous process if you are new to the concept of financial planning. But if you are a mature adult aware of his or her responsibilities, you must have surely thought of doing it at some point of time.
The amazing thing about financial planning is that it's best when you start early, however it's never too late to start.
With a professional's help and multiple sessions spanning to anything between 2 weeks to 2 years, you can formulate a detailed plan to walk on and reach your financial goal.
EXP-Invest is happy to offer it's EXPertise & help you navigate the process through our consultation service. Please reach out to me via WhatsApp or call for more information.
Objectivity, patience and discipline acquired in the process will last you a life time.
Regards,
Kavita
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