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Your Financial Goals
Wednesday, August 29th, 2012

Anything you want to do in your life can usually be quantified in terms of the money that you will need to spend on it. All goals have a monetary value attached to them. For instance, if you want to buy a house in India, you can easily quantify whether it will cost you Rs. 30 lakhs or Rs. 50 lakhs. Financial Goals that you should think about can basically be categorized into Foundation Goals versus Lifestyle Goals

Foundation goals should be given first priority when creating a financial plan. These are common to most people. Foundation goals include:

>> Housing need for shelter
>> Basic life insurance and health insurance for protection
>> Having enough savings to pay for your children’s school and college expenses
>> Having enough savings to pay for your children’s marriage expenses
>> Maintaining an emergency fund to be able to meet any unexpected expenditure

Depending on your means you have to prioritize as to which goals are most important for you and start saving and investing to meet those goals. Just like a building is constructed on a stable foundation, your financial condition should also be built on a stable foundation.

Once your basic needs are met you can start to think about your lifestyle goals. These goals are somewhat discretionary and could differ greatly from person to person depending upon the type of lifestyle you want for yourself and family. Lifestyle goals are highly personal and are often dependent upon what dreams you have. Examples of lifestyle goals include:

>> Owning a vacation home in a hill station
>> Buying the latest digital camera
>> Taking a cruise in Europe as opposed to holidaying in India

Do you need to invest more?
First, it is important to quantify your goals. You must estimate how much it is going to cost to achieve your goals. For example, a buying a home in India could cost Rs.30 lakhs or Rs.50 lakhs or more depending on what you want.

Second, it is important to know at what point in the future do you want to achieve your goals. Your goals could be short-term in nature (within less than 12 months from now), e.g., buying a TV, prepaying your car loan or creating a contingency fund for an emergency. On the other hand, your goals could be medium term to long term, e.g., like buying a bigger home three years from now, providing for your daughter’s college education twelve years from today and having a retirement corpus 25 years hence.

Once you have quantified your goals and know their time horizon, then based on your risk profile, you can select the appropriate savings and investment instruments and assess your borrowing needs.

Financial Planning is meant for rich people- A myth ?
Wednesday, August 29th, 2012
financial planning in India is important to do because it can make your life easier.

While you cannot predict the future, you can certainly be better prepared for it.
A written financial plan is designed to make sure that you are financially prepared to deal with whatever happens in your life. And this is not just dealing with the unexpected events, but basic things like Financial planning is one of the financial exercises that not many people think about. However, buying a car or taking a home loan, funding your children’s education or marriage, or taking care of your loved ones.

You don’t have to be mega rich to have a financial plan. Neither do you have to be very old and approaching retirement. It does not matter how much you earn or what your age is. All of us have something to plan for. In fact, our financial situation influences almost every aspect of your lives….from the type of house we live in, to the type of car we drive, to how many vacations we can take. Regular financial planning can help give you peace of mind.

To achieve your dreams, a financial plan is all you need
Your financial plan entirely depends upon how much effort you are willing to put in. This means not just having a good handle on the details of your income and expenses, assets and liabilities, but more importantly on the following items:

1. Time Horizon and Financial Goals
2. Risk Tolerance
3. Emergency fund
4. Rising Inflation
5. Need for Growth or Income

No doubt there are other factors that are important as well, but we believe that the above five require a more detailed study on your part.

Time Horizon and Goals: It is important to understand what your goals are, and over what time period you want to achieve your goals. Some goals are short term goals those that you want to achieve within the year. For such goals its important to be conservative in one’s approach and not take on too much risk. For long term goals, however, one can afford to take on more risk and use time to one’s advantage.

Risk Tolerance: Every individual should know what their capacity to take risk is. Some investments can be more risky than others. These will not be suitable for someone of a low risk profile, or for goals that require you to be conservative. Crucially, one’s risk profile will change across life’s stages. As a young person with no dependants or financial liabilities, one might be able to take on lots of risk. However, if this young person gets married and has a child, he/she will have dependants and higher fiscalresponsibilities. His/her approach to risk and finances cannot be the same as it was when he/she was single.

Emergency fund: When do you need the money to meet your goal and how quickly can you access this money. If you invest in an asset to and expect to sell the asset to supply you funds to meet a goal, then please understand how easily you can sell the asset. Usually, money market and stock market related assets are easy to liquidate. On the other hand, something like real estate might take you a long time to sell.

Rising Inflation: Inflation is a fact of our economic life in India. The bottle of cold drink that you buy today is almost double the price of what you paid for ten years ago. At inflation or slightly above 4% per annum, a packet of biscuits that costs you Rs 20 today will cost you Rs. 30 in ten years time. Just imagine what the cost of buying a house might be in ten years time! The purchasing power of your money is going down every year. Therefore, the cost of achieving your goals needs to be seen in what the inflated price will be in the future.

Need for Growth or Income: As you make investments, think about whether you are looking for capital appreciation or income. Not all investments satisfy both requirements. Many people are buying apartments, but are not renting them out even after they take possession. So, this asset is generating no income for them and they are probably expecting only capital appreciation from this. A young person should usually consider investing for capital appreciation to take advantage of their young age. An older person however might be more interested in generating income for themselves.

Managing Financial Goals-series2
Sunday, August 26th, 2012

Continued from series 1 more conservative investments. Conversely, if you’re nearing retirement, a greater portion of your nest egg might be devoted to debt investments focused on income and preservation of your capital. Consider how inflation will affect your retirement savings. Inflation reduces your purchasing power with time. When determining how much you’ll need to save for retirement, don’t forget that the higher the cost of living, the lower your real rate of return on your investment

Facing the truth about your child’s education

Whether you’re saving for a child’s education or planning to return to school yourself, paying tuition costs definitely requires forethought–and the sooner the better. With college costs typically rising faster than the rate of inflation, getting an early start and understanding how to use tax advantages and investment strategy to make the most of your savings can make an enormous difference in reducing or eliminating any post-graduation debt burden. The more time you have before you need the money, the more you’re able to take advantage of compounding to build a substantial college fund. With a longer investment time frame and a tolerance for some risk, you might also be willing to put some of your money into investments that offer the potential for growth.

Consider these tips as well: >> Estimate how much it will cost to send your child to college and plan accordingly. Estimates of the average future cost of tuition at two-year (MBA education) and four-year private colleges and universities are widely available.

>> Research financial aid packages that can help offset part of the cost of college. Although there’s no guarantee your child will receive financial aid, at least you’ll know what kind of help is available should you need it.

>> Look into tuition plans that put your money into investments tailored to your financial needs and time frame. For instance, most of your money may be allocated to growth investments initially; later, as your child approaches college, more conservative investments can help conserve principal.

>> Think about how you might resolve conflicts between goals. For instance, if you need to save for your child’s education and your own retirement at the same time, how will you do it?

Investing for something big

At some point, you’ll probably want to buy a home, upgrade to a bigger home, a car, maybe even that vacation home in hill station that you’ve always wanted. Although they’re hardly impulse items, large purchases often have a shorter time frame than other financial goals; one to five years is common.

Because you don’t have much time to invest and expertise in investment, you’ll have to budget your investment wisely. Rather than choosing growth investments, you may want to put your money into less volatile, highly liquid investments that have some potential for growth, but that offer you quick and easy access to your money should you need it.

Managing Financial Goals-series1
Sunday, August 26th, 2012

Investing for major financial goals
Most people invest for retirement, to pay for children professional education, or to upgrade your house. Whatever your goals, you’ll need to have a proper plan for each one so you’ll know when you’ve accumulated enough. You might consider consulting a financial advisor, too. Some goals, like your retirement, for example, may require more than 15 years of saving, so it’s never too early to start planning. The early we start better we are

How do you set financial goals?
The first step in investing is defining your dreams for the future. It’s best to be as specific as possible. For instance, you may know you want to retire, but when? If you want to send your child to college, does that mean a private college or government college or instead an abroad education?

You’ll end up with a list of goals. Some of these goals will be long term (you have more than 15 years to plan), some will be short term (5 years or less to plan), and some will be intermediate (between 5 and 15 years to plan). Once you put the time line of each goal – Short term, long term, intermediate term, you may then decide how much money you’ll need to accumulate and which investments can best help you meet your goals.

Looking forward to retirement
After every hard day at the office, we ask ourselves, “Is it time to retire yet?” Retirement may seem a long way off, but it’s never too early to start planning–especially if you want your retirement to be a secure one. The sooner you start, the better off we are, you have to let time do some of the work of making your money grow.

Let’s say that if you want to retire at age 65 with Rs. 50 lakh in your retirement fund. At age 25 you decide to begin contributing Rs. 5000 per month to your company’s PF account. If your investment earns 8 percent per year, compounded annually, you would have more than Rs. 50 lakh in your PF account when you retire. (This is a hypothetical example and does not represent the results of any specific investment.)

But what would happen if you left things to destiny/chance instead? Let’s say you wait until you’re 35 to begin investing as you feel that you have enough time to get age 65 years! Assuming you contributed the same amount to your PF account and the rate of return on your investments was the same, you would end up with only about half the amount in the first example. Though it’s never too late to start working toward your goals, as you can see, early decisions can have enormous consequences later on.

Some other points to keep in mind as you’re planning your retirement saving and investing strategy:
Plan for a long life. Average life expectancies in India have been increasing because of better health facilities and many people live even longer than those averages.

Plan your retirement as per current expenses and taking inflation into account. Think about how much time you have until retirement, then invest accordingly. For instance, if retirement is a long way off and you can handle some risk, you might choose to put a larger percentage of your money in stock (equity) investments that, though more volatile, offer a higher potential for long-term return, however if retirement is nearing then you need to invest in short term funds and debt instruments.