Investment Options for Your Financial Goals

In our earlier post, we had seen how important it is to write down your goals, it is important to even quantify them and set certain timelines to your goals. Now that you have quantified your goals and you have even set timelines to your goals, it is time you select suitable investment options for your goals. And in this blog, we are exactly going to do that, we are going to help you choose the right investment options so that you reach your financial goals.

Now, there are a lot of investment options available in the market like traditional debt instruments, debt funds, pure equity, equity funds, etc. But what option you ultimately choose for your goals depend upon 4 factors as below:

1. Time available/ investment horizon

2. Current financial position

3. Returns expected

4. Risk profile

Let us take an example to understand this better:

Let us say, you want your son to have his higher education in the US. The present cost is Rs. 25 Lakhs, you have 16 yrs in hand and future cost of the goal is around Rs. 74 Lakhs.

The first factor that influences you investment option is your time available or your investment horizon. In this case we have assumed it to be 16 yrs. Ideally for a financial goal which is more than 5 + yrs away, the asset class you should invest in is equity. So you could invest into pure equity or equity funds. But, let’s say there is someone who has only 2 yrs for his goal, equity cannot be his investment option as it would volatile in the short term. He would have to invest into debt funds or traditional debt instruments.

The next factor which influences your investment option is your current financial position regarding that particular goal. Take the same example, where you want your son to have his higher education in the US and have 16 yrs in hand. Let’s say you have not made any investments regarding this goal yet. As discussed, equity is the best asset class for such a goal and so you would need an SIP of 13,000 into equity mutual fund with returns expectation of about 12%, if you have to reach your financial goal. In case there is someone else who already has accumulated 10 lacs for this goal, he can put these 10 Lakhs into debt for 16 years which should give him around 8 % returns and he can start an SIP of 10,000 into a debt fund which should give him 8% returns post taxes. So, he has no need of concentrating his investment into pure equity since he does not need aggressive returns.

The third factor which influences your investment option is you returns expectation.

Referring to the same example where you have 16 yrs in hand for your son’s higher education and you need 74 lacs at the end, you have not invested anything yet. Like we said you have multiple options… you could start an SIP of 19,000 into a debt fund with returns expectation of 8% which will help you accumulate 74 lacs. But what if you cannot afford an 19,000 monthly SIP? You would have to take the risk of investing into an equity fund with an SIP of 13,000. Now when I am saying risky…I don’t mean equity is always risky….in the long term equity shows positive results. You will have no choice other than equity funds or you will have to compromise with your goal.

Now this factor that we discussed is directly proportional to our last factor which influences our investment option choice. And the last factor is one’s Risk Profile.

For someone who is very risk savvy an SIP of 13,000 into equity fund with returns expected at 12% would do…..but for someone who does not want to take much risk……would have to choose a less risky option like debt funds but would have to contribute a bigger amt which again depends on how much he can invest each month which is nothing but again his financial position.

So this is how you would have to check your current financial position, investment horizon, your risk profile and in turn your returns’ expectation to finally choose your investment option for your financial goal.

Hope this post will help you asses all these factors and help you choose a suitable investment option.

Define Your Financial Goals

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.

Understanding Your Current Financial Status - Part 2 - Net Worth Statement

 Net Worth Statement

A net worth statement tells you, what, is your financial situation at a given point in time. 

                                           

                         Net Worth = Assets – Liabilities 

There are 5 types of Assets, which are

1.      Equity which includes Equity Stocks, Equity MFs and ULIPs
2.      Debt which includes FDs, Debt funds, PFs ,Post office investments, Traditional life insurance policy premiums (money back or endowment, etc).
3.      Liquid which includes Cash, Savings account and Current account balance and Liquid Mutual Funds.
4.      Gold which includes Coins, Bars, Gold Funds, Gold ETFs
5.      Real Estate which includes house, land and commercial space

Liabilities would include all your loans.

We have excluded cars and jewellery out of the assets as we may think they are our assets but we seldom sell these. We have included the house you live in assets as we have taken home loan in liabilities. We hardly sell this asset as well.

Now as we talk today net worth can be positive for someone or even negative.  A negative figure hints that we should make plan to eventually move towards the positive and build our assets so that our financial goals are achieved.

Understanding Your Current Financial Status - Part 1 - Cash Flow Statement

Understanding Your Current Financial Status:

You need below 2 statements to understand your current financial situation:

1.       Cash flow statement
2.       Net worth statement

1. Cash Flow Statement

Cash flow statement tells whether you are generating surplus income post taxes and life style expenses. This data should be taken for a financial year, as some expenses would be yearly.

Some professionals and business owners might at times have no clue if their expenses are exceeding their income, as their income is variable and people might fail in keeping track of all the inflows and outflows.

Now putting together a cash flow statement would tell you how much of investible surplus you have. And below simple formulas…which have been found to be useful, most of the time…. Could be used to finds the problem areas and take corrective steps.

And even if there are no problem areas, below ratios should be checked if our surplus is enough for us to reach our financial goals.

Savings/Take home pay= min 30% (saving for your long term goals such as kids higher education, retirement, etc.)

(Debt+All household expenses)/Take home pay=max 50% (households expenses would be ones like food, entertainment, education, fuel, rent)

Floating expenses=20%(Short term goals like vacation, car, electronics, etc. and emergency fund for medical expenses, etc.)

In Next Blog, we will talk about Net Worth Statement.

50-30-20 Rule of Budgeting

 50/30/20 rule of budgeting

It is such a cliché, we get educated so much, work hard in life so much to have a decent living or to simply put ‘earn well’, but once we start earning, we don’t know what to do with it.

Most of us think, finance is a pretty heavy topic, something we would not understand much about, but to manage our own personal finance, we just need to know some basic things about personal finance, and that is it!

I know, at times when you have a sizable expense, it keeps you wondering, whether you have over spent on the item or was it ok, or when you take a loan, you wonder whether you have over borrowed or no.

With this article, you would know a simple and a really handy rule to track your budget, which we call the 50/30/20 rule.

It would help you know, whether you have borrowed well enough in your capacity to pay back, at the same time save enough for your goals and manage your day to day expenses too.

So, here it goes, as per the representation above, all your expenses like utility bills (grocery bill, electricity bill, phone bill, etc.), expenditure on fuel, entertainment, education, outside food, etc. and rent or Home loan EMI should not cross 50% of your take home salary.

You should allocate 20% of your take home pay i.e. salary after paying taxes, to your short term goals (goals within 3 years) like buying a car, going on vacation, buying any electronic item, putting together an emergency fund for sudden medical expense, for sudden job loss situation, etc.

And you should be able to save and invest 30% of your take home pay for your long term goals (goals beyond 3 years) like kids’ higher education, their marriage, your retirement, etc.

Now, check your own take home salary and check whether fixed expenses and floating expenses are well within above limits or no. And, if no is the answer, you need to put it right and save at least 30% of your take home salary henceforth.

So, with this handy rule, budget well. Stop worrying about money and start loving your budget. After that, I am sure you would save well. Meet you in the next article. Until then happy budgeting!