Is Your Money Still Sleeping?

Yes, you read that correctly. Despite the fact that you have been taught since childhood that money must be earned the hard way, there is less emphasis on teaching us “how money grows money.” It is impossible to achieve all of your financial objectives without meticulous planning. Surprisingly, most working professionals have no idea whether their money is properly directed toward their financial goals.

Isn’t this strange?

If you really want your money to work hard, you should invest your next 5 minutes on this blog.

Here’s a step-by-step guide to financial planning:

1. Quantify financial goals- This will be one of the most important discussions that you will have with your family- sit down with your spouse, parents, siblings and children – all in the family to whom you bear a financial affiliation- and and make a list of financial goals you have in coming years, be in short, medium and long term; viz. higher education for children, house, car, medical expenses, marriages, retirement, vacations, major gadget upgrades, etc. 
2. Extrapolate the future amount- Let’s understand this with example, let’s say, if the current cost of an MBA in the United States is ₹50 lakh, and your child is 12 years old, you must figure out this amount by adjusting for inflation 10 years later, when your child is due for his course. Assuming 7% inflation per annum, the cost of this overseas course after 10 years would be around ₹1 crore.
3. Evaluate whether you will reach there timely- Now the most important step is to evaluate whether you will be able to achieve your financial goal timely.

For example, suppose your intended retirement corpus is ₹4 crore in 20 years. Your current corpus is ₹50 lakh. Assuming an 8% CAGR (conservative yield) from here, it will become ₹2.3 crore. A ₹25,000 monthly SIP will get you an additional ₹1.48 crore in the next 20 years. This will leave a deviation of ₹20 lakh at the time of your retirement. So, if the SIP amount is increased to ₹29,000, we are sorted with ₹4 crore at retirement age. However, this is simply math, and it may not be possible to scale up your SIP amount immediately. So, what do you do?

Let’s see in detail how you can maneuver towards your financial goals, by taking some examples:

#1 Retirement Planning: If you are a salaried professional, then your regular income/ salary may stop after your retirement or whenever you decide to hang up your boots. However, your expenses will increase based on the YoY inflation rate. Also, another thing to consider is that your salary would not remain static year after year. So in the earlier example, if you’re not in a position to increase your SIP amount this year, you may be able to do so next year with a raise.

For example, if your monthly expenses are ₹1 lakh per month, assuming 6% inflation YoY they would be around 3.2 lakh after 20 years. Add to that ₹1 lakh per month on medical expenses. Now, how much should be your corpus at retirement, which even at a mere return of 4% annually would give you ₹4.2 lakh per month?

You need to use the “Rule of 100” to figure out equity allocation. Let’s say your age is 35, your equity allocation should be 65% (100-35). Using a Balanced fund, or manually doing an asset allocation between equity and debt based on this formula will help you straddle risk and growth.

#2 Risk Planning: Risk is inevitable, and hence the role of insurance comes into your financial planning needs. It fills the financial gap that will be created in case any unforeseen event happens in the family. An ideal insurance cover should be 20 times your annual income plus the outstanding liability like home, auto loan.

For example, Your annual income is ₹20 lakh and a home loan outstanding of ₹10 lakh. Ideally your cover should be ₹4.1 crore (20 x 20 lakh + 10 lakh).

#3 Cash Flow Planning: One should ideally make a list of planned cash flows coming up in next 12-18 months and park that money in a low-risk interest bearing instrument like FD or other govt saving scheme.

For example, if you are planning a house renovation worth ₹5 lakh or a family trip that would cost ₹2 lakh in the coming 6 months, you should not invest that in equity / other illiquid assets. Instead, put that money into FDs or other liquid investments.

#4 Debt Management: Today, almost everyone has an outstanding loan. Some have taken out a home loan, while others have taken out an auto loan; it is critical to have sufficient cash flows to honor those payments on time, either through regular cashflows such as salary/business income or returns from existing investments.

#5 Goal Division: Divide your other goals like buying home, foreign trip, child’s future education, buying an expensive car, etc. into LONG TERM and SHORT-TERM goals, see whether you are able to address those loans with proper cash flows at right time or not and adjust your investments accordingly.

#6 Real Estate, Succession Planning: Very few reading this article would have made a will or shared all their investments with their family members. It is imperative to give equal weightage to transferring wealth to your near and dear ones. In fact, it is equally important to make a succession plan, similar to the way we make a wealth plan.

You need to sit down with your family and share your investment details, the contact details of your relationship managers and bankers, and hire a lawyer’s services for making a proper will.

 So after reading this article, if you think you are missing out on some or all of the financial activities, today is the right time to start this process. If needed, hire a Certified Financial planner and document this activity.

Happy Investing !