Financial planning - Basic rules -9

Taking investment decisions : 

You can build a good financial success if you have a plan in place .

It is a proven & accepted truth that if you have a plan then you are in better position for strategies planning & it increase the probability of achieving the goal.

Then what we have to do is to simply plan target for each and every rupee we invest & align the returns from it to the financial goals in life.

A classic example of the goal based planning is planning a holiday . when we make a plan for holiday we think about three things on priority

1.  The destination

2.  The time available with us

3.  The pocket affordability.

The we plan how to go i.e. we choose the vehicle to travel ,

The same logic you have to apply to your financial management .

1.       Plan destination i.e. your financial goal.

2.       Time available : how many years you re away from your goal

3.       How much you can afford to invest for the said goal

Then you have to find out the investment opportunities available in the market, see weather they are aligning to your expectations or not , weather they are in capacity to take you to your destination. Choose the optimum risk & optimum return giving instrument out of the choice available.

This is how you can fix on the instrument which is suitable for you . most of the people do not think at all about the goals while investing their hard earned money & soon find them in problem when the time comes.

What is a financial goal and how to set it ? :

A goal in life which requires financial backup is called as financial goal.

The setting up financial goal is about knowing the amount required for the goal at the time of its completion.

There are different types of financial goals in individuals life but the most common are  Child’s education , child’s marriage & retirement planning .

How to find out the amount required at that point of time ?

You have to first find out the cost of such expenses as on toady, then find out the growth in the expenses in last few years ( there are some assumptions which we have to consider to find out the financial goal ), then calculate the future value of expenses considering the time in years for such expense  inflating it with the assumptive growth rate . you can find this using excel Fx function.

For eg. If you are planning for your 2 years old child’s higher education. It means that your child will require it at age 18, suppose such expenses are Rs. 500000 and the growth in such expenses is 10% per year . then we have to inflate Rs. 500000 for 16 years @10% per year.

Aprox. 2297500/- would be the requirement at that time which is Rs. 500000/- as on today.

So now destination is clear  Rs. 2297500/-

Time available is clear : 16 years

Growth rate is assumed @ 10%

If we assume the rate of return to be 12% per anum the monthly investment required is aprox. Rs.4210/- 

per month, weather this is affordable ? if yes you can go ahead to find out investment instrument which can give you the return for 12% and invest in it for 16 years.

If no,  either you have to find out an investment instrument which can give you higher comes returns or you have to change your goal because in this goal you can’t  change the time.

In this way you have to set the financial goals for you & have to find out the requirement for same.  Then calculate the requirement of investments for each goal & find out the instrument which aligns your requirement & affordability .

There is other way also by which the un-achievable goal also can made achievable but this requires more complex calculations where you may require consultants help . we do such a type of complex calculations for our clients & help the to achieve their financial goals.