Savita got her first job at the age of 23. She was delighted. When her first salary cheque arrived, she felt proud and important. So, when the local life insurance agent sold her life insurance she did not know what she had signed up for. But she had a vague idea that the policy would give her some money in the course of her life. She was not sure how much exactly, though. Yet, this did not bother her.
The same agent advised her to start a Public Provident Fund and she did so. By the time she was 30, she had been sold four more insurance policies. She also had some fixed deposits and mutual fund investments. The relationship manager of her bank suggested that she invest in Equities. Savita did so and held the stocks in a demat account.
At the age of 30, Savita got married. Her husband was a wealth manager. He handled the investment portfolios of several high-net-worth clients. Savita was anxious to show her husband that she too was a savvy investor.
Her husband examined the portfolio. He found that she had bought multiple products in various instalments without a plan. There were redundant products may not really help her. She just wanted to start saving and save tax. And then she had bought it from people who were referred to her out of obligation at times.
Lesson to be learned
Savita’s case is not unique. Many people, though generally organised, are not having the same approach to managing their money. They do not have a financial plan in place.
Say, you have to get to a particular place. You even set out for the destination. But you do not know which road to follow. This is rather like that.
Hence, it is important to decide on your goals and make a plan to reach them. You would then have a road map that is most likely to take you there with very few hazards on the way. You may have to pass some milestones so that you know that you are on the right path.
How do we go about it?
Having measurable goals makes achieving them easier. Indeed, it is too much to expect anyone to have goals while they are still studying. But it would be useful if people started planning their lives as soon as they start earning. Goals would be based on what you intend to achieve and how much time you have for them. It could start with short term goals like buying white goods, bikes, cars, holiday packages to medium to long-term goals like buying a house, securing your family, meeting their needs and then on to Retirement.
Goal based financial planning
Goals give meaning to your savings and investments. They help you stay focussed and steer towards it. As per research people who link their investments to goals stay invested for a longer period of time and do better. Of course, your goals may change with time. At 35, you may plan to leave your current job in another five years and start your own venture. This would require a change in the financial plan to build reserves that can take care of your monthly expenses for a certain period of time, say 3 years while you build the new business.
Practical steps involved in making a plan
Here is what you need to do.
1. Set goals
The goals should be realistic and quantifiable. You should be able to achieve them with your current and expected future earnings.
2. Identify the time and amount you need
Goals can be short-term, medium-term, or long-term. Allot specific time frames by when you wish to achieve them and calculate the amount of money required to meet them. Remember to include the impact of inflation on this.
3. Prioritise goals
Think about the goals that are important to you. Identify which are essential to your well-being and happiness. Focus on achieving them first.
4. Decide ‘how much money where’
In other words decide the set of investment options you would like to choose based on the quantum of the goal, time available, return expectation and ability to take risk. Further decide how much you invest where, in which set of investment options or ‘asset class’ as they are called in the financial world. It would be good to get expert help from an Advisor. But there people who wish to do it themselves. This is fine as long he or she is well versed with it and has the time/ability to do research.
5. Track progress
Monitoring your investments is equally important where you re-balance your portfolio of products as required and review to ensure that you stay with the best. Are the investment returns according to your expectations? Are they tax-efficient? You may have to change course mid-way if parts of your portfolio are underperforming. Finally what matters is how close you are moving towards your goals and not individual product performance.
The bottom line
Build some flexibility into your goals and investible resources. You need to have the leeway to make changes if required. It is possible that your goals and priorities will change. So, your financial assets should be able to factor in those changes. You should not have to rearrange your portfolio too much.
Mutual Fund Investments are subject to market risks, read all Scheme related documents carefully.
This is a partnered post.
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Updated Date: Apr 07, 2017 18:18:58 IST