Your pay cheque gets hiked every year and when you change a job it takes a leap, but our goals
remain same and so does the amount getting invested. A yearly hike is the right
time to increase your investment amount every year.
Another reason,
why a stepped SIP is required is that, when you plan your goals you assume a
certain rate of inflation, but what if in a tenure of 20 years there let’s say
a step up of 2% in the rate of inflation? Stepping up your SIP can certainly take
care of this possibility. And if not done, it only results into spending.
Reason 2 for
increasing your SIP that, if you have aggressively kept your returns
expectations. Say, 15% and your investments are still able to return 14% p.a.
which is still a good return. But with this short fall, you might fall short of
some amount when you reach your goal.
Reason 3, we
advise to shift your equity investments to debt when you are within 3 years of
reaching your goal. Debt will give lesser returns than equity, but we had
assumed returns what equity could give for the entire investment duration, so
this shortfall is also what a step up SIP, can easily accommodate.
Reason 4, if a new
goal gets added to your financial plan, you can attach this stepped up SIP to
that goal. This will certainly ease your burden.
Reason 5, as SIP
is a discipline, another disciplinary step for stepping your SIP each year can
do magic to your end corpus.
Let us take an
example and see what magic can a step up SIP create.
Importance of financial planning and the steps involved.
Financial planning is the process of utilizing your
available financial resources in the best possible manner so that you achieve
your goals.
Why do you need to have a financial plan?
1.Inflation
Impact: When your mother goes
grocery shopping and comes back, I am sure you must have heard her saying. I
bought rice today at Rs 50 per kg , I used by the same rice at Rs 10 per kg when
you kids were younger. This is inflation. Steady increase in the prices of
goods and services. As the prices of these goods and services increase so does
the cost of our future goals. If today it costs 25 lacs for higher education
abroad, it would cost 73.4 lacs when your kid grows up after16 yrs, if
inflation is at 7%. Inflation has a compounding effect.
2.Contingency
fund availability: You may never know when the job scenario turns gloomy.
Also the yearly hikes are not in line with the prevailing inflation. And so
planning becomes of utmost importance.
With
elderly parents in house and unexpected medical instances on the rise, it calls
for keeping contingency fund ready for such situations. When people don’t plan
for future goals and have surplus income, second home is the preferred choice
of investment which is a very illiquid asset….financial planning helps you take
into account not just your long term goals but even your short term needs.
A thumb rule suggests keeping 6 months’
salary in highly liquid form for this need.
3.Retirement:
Like our father’s generation, we will not be supported by any pension structure
and so planning for the retire life is a crucial aspect. With life expectancy
on the rise, it becomes all the more important to plan your retirement
You would need a retirement corpus of 5.2
cr, if your monthly expenses are @ 50 K today, if you wish to retire at 55 and may
live till age of 80 yrs.
4.Insurances:
Financial planning helps you know your worth, which in turn helps you asses
your insurance needs which shield you family from financial loss in case of
life loss or any medical condition.
This gives you a sense of security as you
are adequately covered.
5.Investments
are tied to goals: Since any money decision impacts your financial planning,
you keep your money decisions in line with the financial plan like decisions on
tax planning, insurances, etc. This also keeps you away from ad hoc
investments. Also you do your tax planning in advance in line with your goals.
6.Cash flow
management: Financial planninghelps
you manage your inflows and outflows in a way that you utilize your resources
in the best way to achieve your goals. Helps you cut out unnecessary expenses
and gives a strong hold over your financial situation.
7.Achieving
your financial goals: You achieve your goals comfortably as you start early
and have a solid plan to meet your goals.
Now that you know why financial planning is essential, below
are the steps which would help you put a financial goals together:
