Identify your financial goals
(Note:? This article is aimed towards readers in India but the principles are the same throughout the world)
For individuals, the first step in their financial planning exercise is to set their goals/objectives.
By setting your goals you know exactly what you want and can accordingly redouble your efforts to realise your objectives.
For individuals, making investments has different purposes.
For some it may be simply for saving money as and when required for future needs, while for others it may be towards a specific goal/objective.
An individual’s life is full of events.
While some events are unpredictable such as accident or sickness, many of them are basic, yet important life stage events like child’s education, marriage, planning to buy a property, retirement planning.
A common link between both predictable and unpredictable events is that it can put tremendous strain on your finances, so if you are well prepared for the same, it may not be as burdensome.
This is where the importance of setting goals/objectives becomes palpable.
You have saved some money, but you do not have a specific objective in mind.
If need be, you can employ it for something as critical as buying a house/property.
At the same time you have no qualms about buying a car with that money or even going for a vacation.
Coincidentally, finances for your child’s education are also expected to be met from that investment, ditto your daughter’s marriage.
So you have a half a dozen needs and just one fund.
This is a perfect recipe for a financial disaster.
Expectedly, you are not aware when and for what purpose you will require money in an emergency.
However, you could have at least planned for a contingency fund/reserve, but didn’t.
In such a scenario when you meet with an emergency situation, you find yourself in a lurch since you have nothing to fall back upon.
If you have set aside another fund for a critical objective like child’s education, you may be tempted to dip into that fund to handle the emergency, which is a regressive step as far as your child’s future is concerned.
If you do not have funds when you need them (like in an emergency) you may be tempted to take a loan (increase your liabilities) or ask a favour from your friend (which can be an embarrassment if it happens often).
Either ways, this is not the best way to counter a financial emergency and can impact your finances significantly.
The above-mentioned problems can be countered through a straightforward solution — identify your objectives well in advance.
When you set objectives upfront, you know the purpose of the money as also the timing (when you will require the money).
Your facing a financial crunch is highly unlikely as you are aware about the quantum of money required for an event that is planned for well in advance, and thus you have made your investments accordingly.
Even if it’s an emergency, you are well prepared for it through a contingency fund.
Once your planning is in place, you are self-sufficient and are in no need to ask favours from any source.
Since your financial planning exercise is heavily dependent on your ability to set clear objectives, it should be very comprehensive, and should make provision for predictable as well as unpredictable events.
While there are several important objectives an individual must plan for, we have taken one that is critical for most parents — child’s education.
The cost of education in today’s age can be prohibitive.
However, if you have planned for it, the cost may not prove all that burdensome.
Let’s see how this can be made possible.
Assume that at present an MBA programme of 2 years in a leading business school costs Rs 500,000.
The age of your child is 5 years today and he/she will pursue the course at the age of 20 years.
The time available to plan for your child’s education is 15 years.
Assuming that the cost of an MBA degree appreciates at 10% per annum, the degree after 15 years would cost Rs 2,088,624.
Now this seems to be a bit too much, doesn’t it?
But not when you plan for it.
If you have your objectives and investment plans in place, this amount may not be that difficult to achieve.
Now that you are aware of the amount required for your child’s education, the next step is to make the investments to achieve that target.
Let us assume that over a 15-year period, you make investments in well-managed diversified equity funds which yield a cumulative return of 12% CAGR (compounded annualised growth rate).
This would entail investing around Rs 4,430 per month.
Suddenly the Rs 20 lakh (Rs 2 million) education fees do not appear so daunting.
Imagine, what would be the consequence if you have not planned for this astronomical sum in advance.
Paying for your child’s education at that stage would prove to be a mammoth task for you.
The above strategy of planning well in advance holds good for other objectives as well such as buying a property or your child’s marriage among others.
The key to successful investing lies in regularly setting tangible, realistic goals and working towards achieving them.
Individuals should have multiple portfolios, each of them catering to a earmarked objective.
While setting objectives could be an easy task, the challenge is to get the right asset allocation.
A well-qualified and honest investment advisor can play a vital role in this.
But the onus of planning well in advance to realise your objectives is on you.
How to identify your financial goals (rediff.com)
When you make aimless investments without an objective you may face difficulties. Thus, it crucial to set your financial goals first.
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