Defining your financial Goals is an important step in Financial Planning Process. We all have dreams and wishes but to fulfill them we need to write down these Financial Goals and take step towards achieving these goals.
Examples of Financial Goals are Children Education, Children Marriage, Dream Home, Retirement Corpus, World Tour, etc.
The most neglected part of this process is writing down these goals. We vaguely remember these numbers but never sit down and calculate the actual amounts to achieve.
Quantifying your financial goals is an important thing and one should do it as early as possible.
e.g. Let us say you want to send your son/daughter to a reputed institute for MBA. Now a days the cost of MBA in a good college is between 20 to 25 Lakhs. Suppose your child is 5 years old now. So, he/she will require this money after 17 Years. Considering an inflation of 8% p.a., amount required for his/her education would around Rs. 75 Lakhs.
See this is the dark side of compounding. When your money grows with compounding we feel so happy. But compounding plays the same role on expense part also. So, first define your financial goals then quantify them and start acting as early as possible.
Another important part in Defining your financial goals is segregating your needs from wants. First try and cover all your needs and then start planning for your wants.
Please find below mentioned are few examples of NEEDS and WANTS.
NEEDS:
1. Retirement Corpus
2. Children Education
3. Children Marriage
4. First Home (For Occupancy)
WANTS:
1. Dream Home
2. World Tour
3. Dream Car
4. Farm House
Please watch below video to get more idea about how to define your financial goals.
Let us discuss a Retirement Planning case in this post.
Current Age: 35 Years
Retirement Age: 55 Years
Inflation : 8% p.a.
Current Monthly Expenses: 1,00,000/-
Life Expectancy: 80 Years
Rate of Return: 12% p.a.
Retirement is a new way of life in many ways. Apart from adjusting your work life, you also need to adjust your financial life to the new reality. Here’s what you need to do to build your retirement corpus, if your current monthly expenses are Rs.1,00,000/-, and you expect to retire in the next 20 years.
If you consider the rate of inflation at 8 % p.a., you will need to build a retirement kitty of Rs. 9,35,18,569/- (Rs. 9.35 Crore) to live comfortably.
You will need to invest a lump sum of Rs. 96,94,767/- or invest Rs. 94,534 each month, at an annual return of 12 %, in order to enjoy your golden years. For getting 12% p.a. return, you will have to invest in Equity Asset Class. A balanced portfolio can also achieve this goal. The only problem which can occur post retirement is you will still have to keep allocation in Equity Asset Class. If you do not want to do that post retirement the investment amounts and retirement corpus amount will change drastically.
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:
