Cliche: Unless you know where you are headed, you won't get there.
Fact: Unless you know where you are headed, you won't get there.
Anyway you look at it, knowing where you want to be is the all-important first step, and the rest follows. To draw a parallel in the world of financial planning, you first need to decide what you wish to achieve. Put simply, you need to begin the financial planning process by setting objectives.
The objectives could range from buying a car, setting aside money for children's education to providing for your retirement. Typically, there will be multiple objectives, which can range from short-term to long-term ones.
The trouble is that most individuals tend to ignore the "What" part i.e. what do you want to achieve? Instead, they start off with the "How" part i.e. how will you achieve the same? This in turn, leads to an adhoc and directionless investment pattern that may not yield the desired results. The right approach is to decide on the "What" i.e. objective and then follow it up with the "How" i.e. a dedicated investment plan.
There are some pointers that must be borne in mind, when you are setting objectives:
Firstly, at any point in time, you are likely to face multiple objectives. For example, assume that you are a 35-yr old individual with a 5-yr old child and are yet to own a property or provide for your retirement. In this case, providing for the child's education, accumulating a corpus for buying a house and retirement planning are some of the pertinent objectives on hand. Now what you need to do is - prioritise. Start off with the objective that is most pressing and then provide for the others.
Secondly, you are likely to find yourself in a situation, wherein despite the presence of clearly-laid out objectives, you lack the means to provide for all of them. In other words, you may not have sufficient funds to meet all the objectives.
A typical reaction (which can prove costly in the long run) is to postpone investing and "wait for an opportune time". Our advice - never delay investing.
Instead, the key lies in starting off as early as possible and giving yourself adequate time; begin with the investible funds that you have and make up for the shortfall at a later date when hopefully you will have more funds at your disposal.
Finally, setting objectives is a very personalised activity, i.e. it has to be right for you. The activity should not be influenced by external factors like your friends, relatives or peers. This is vital since what you set out to achieve is what you will eventually land up with. Ensure that you put in adequate thought before arriving at the objectives.
How to get there
Having discussed, how to set objectives, let's now take a look at how you should go about achieving those objectives. Becoming a crorepati (Rs 1 crore is Rs 10 million) is often viewed as the pinnacle of affluence.
Let's assume that you are a 30-yr old individual who wishes to retire at the age of 60 years; this gives you an investment horizon of 30 years. Furthermore, you have decided that you need a retirement kitty of a crore to take care of your post-retirement expenses. Here's how you can achieve your investment objective.
We shall assume 3 scenarios, wherein investments made to achieve the stated objective (becoming a crorepati), yield returns of 12 per cent pa, 15 per cent pa and 17 per cent pa.
Become a crorepati
| Objective (Rs) | 10,000,000 | ||
| Tenure (years) | 30 | ||
| Case 1 | Case 2 | Case 3 | |
| Rate of return (%) | 12 | 15 | 17 |
| Annual investment required (Rs) | 41,437 | 23,002 | 15,445 |
| Monthly investment required (Rs) | 3,277 | 1,796 | 1,197 |
As can be seen in the table, if your investments yield a return of 12 per cent pa, then you need to invest Rs 3,277 per month or Rs 41,437 pa (over 30 years). If you take on higher risk and the investments yield a return of 15 per cent pa, then the required monthly and annual investments drop to Rs 1,796 and Rs 23,002 respectively.
Finally, if the investments yield a return of 17 per cent pa, then you need to invest Rs 1,197 per month or Rs 15,445 pa.
Clearly, becoming a crorepati isn't as difficult as it is made out to be. All you need is a well-defined investment objective and a plan to get there. Of course, your investment advisor/financial planner will have a vital role to play in helping you make investments and ensuring that the investments deliver the results expected of them.
In fact, he can even help you in quantifying your investment objectives. For example, if the investment objective is to provide for your child's education 15 years from now, he can help you with the computations to determine how much money you will need to provide for the objective.
In conclusion, getting your objectives right and having the necessary investment plans in place will ensure that you are on a sound footing to achieve your goals - and that's a fact, not just a cliche.
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