Planning your Personal Finance is channeling “YOUR” Financial Resources to “YOUR” Financial Goals. It is to accumulate wealth over a period of time to meet all Personal Goals through a defined process.
Individuals have miserably gone wrong with money management because of two things
- They are too lazy / busy with something to do it themselves
- They have been misguided by their financial intermediaries
Let’s take an example of Vikas age 30 quantifying what he and his family could lose by not getting a plan done for the next 5 years. He is clueless about his investments and is busy with his career; earns well, but does not know to channelize it effectively.
Retirement Planning
Vikas’s monthly expense is Rs. 35000 and he needs to build a corpus of Rs. 6.8 crore to meet his 20 years retirement expenses from the age 60 to 80 independently. To build this corpus he would require to invest Rs. 14800 every month in equity oriented schemes over the next 30 years. The power of compounding would ensure that he reaches this corpus.
But if he delays this action and starts after 5 years he would have to shell out Rs. 29100 per month for the remaining 25 years. The additional outflow will be more than 43 Lacs. This is the cost of delaying the start of retirement planning.
Choosing a Wrong Asset Class
The simplest and the most effective way of asset allocation is Debt for short term goals and Equity for long term goals. But it is the most difficult and people generally do not look at Equity as an asset class, or even if they it is for short term or for trading, which is the biggest mistake people do. They settle for a Bank FD for long term.
This can be taken care if you have a proper plan in place and you go according to it. Let’s look at another example.
Vikas wants to accumulate Rs. 20 Lacs in today’s cost for his son’s higher education when he turns 18. The cost then would be Rs. 80 Lacs. For achieving this goal Vikas would have to invest Rs. 9000 per month for 18 years in equity oriented investments which are likely to give him a return of 14% CAGR. Like most people if Vikas would have invested in a Bank FD or any other debt / insurance product which would have yielded 8% for this long term goal he would have to invest Rs. 17000 per month. The additional outflow will be Rs. 17 Lacs.
Keeping money idle in Savings Account
People of India are very lethargic, have a lack of clarity on future goals, so monthly savings stay in their bank accounts. They awaken after a lot of cash accumulation in their bank account. Then they either go for a big car or a LCD TV. They also fall prey to their financial advisors’ / bankers’ petty investment ideas as they keep a close watch on their bank account accumulation.
Vikas had accumulated Rs. 7 lacs in his bank savings account earning @ 3.5% which has accumulated over the last 5 years since he started working. If he leaves Rs. 150000 in the bank savings as a contingency fund and invests the rest Rs. 550000 in Equity oriented Mutual Fund earning @ 14%, he can easily double his money.
Buying Wrong Insurance Products
People are happy with the more number of policies that they are buying, so is Vikas as he has 7 policies for which he pays a premium regularly during the year. But the total cover is only of Rs. 22 Lacs and the total premium for the same is Rs. 107000. Needless to say that all of these products are either traditional in nature or are ULIPs with higher charges, whereas on the other hand he requires a cover of Rs. 90 Lacs. One will know the cost of being under insured by Rs. 68 Lacs only when the ultimate certainty strikes and the family faces the heat in those 5 years.
Getting into Bad Loans
Borrowing is “spending future uncertain unearned income today”. Many of the debt can be curtailed by delaying the decision of buying.
Vikas wants to go on an international vacation which will cost him Rs. 3 Lacs. If he can’t hold back this decision he may end up paying Rs. 10700 as EMI option by the tour operator eventually leading to Rs. 3.85 Lacs outflow. Instead if he delays the trip by 3 years and invest Rs. 8800 per month @ 10% to build up a corpus the net outflow would have been only 3.15 Lacs. Why not utilize the savings to fund domestic vacation for first 2 years?
After reading all of the above please do not understand that I am trying to scare you. I am just trying to tell you how a plan will help you to achieve your goals. This is a much systematized pathway with a defined process towards generating Wealth.
So do not wait act fast and get your personal finances in a much more organized manner to reach you financial goals.
Disclaimer
The above given examples are just for your information purposes, none of the above examples match to any of my client’s data. Please contact the author for further clarification.
Vivek Mallick, CFP
E-mail: vivek.mallick@finessecapital.com
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