The obvious question in everyone’s mind is “Where to invest”? What most people want is a personalized answer depending on their situation. They want an advisor to understand their situation, their mind set and tell them which are the best financial products to invest in. But here, the limitation is that you need to do it for yourself and it’s not that tough a task. With the help of some defined rules, you can pave that path for yourself. Before you choose a financial product, it’s important to choose the category of that investment, and that would depend on two things:
1. Is your goal a short-term goal or long-term goal?
2. Do you want to take high risk on your investment or low risk?
With these 2 inputs, it’s almost clear what should be the asset class you should invest in. There is no confusion here. If you look at the graph below it clearly shows you the options.
Coming to our example, you can see that quadrant 4 fits the situation. It’s for a low-risk and long-term goals mix. You can see the options for investments.
Now all a person needs to do is choose few options from there and then find out some good investment products in that category. You have to pick the products but don’t get threatened by it, just pick some good mutual funds that have performed on a long-term basis. Don’t try to catch the “best” fund, that’s just a myth !
In our example you can see that if you want to invest Rs. 9,300 on a Monthly basis, then you can start a Rs. 5,000 SIP in balanced funds (may be Rs. 2,500 SIP in two balanced funds) and invest the remaining Rs. 4,300 in your PPF account on a monthly basis (you can set up that online most probably, which we will see in the coming chapters). Now if you have to summarize, you can see how we planned for a particular goal in few minutes so easily.
Now let’s look at 2 more examples to make it clear to you on how to plan for a goal.
One-time investment with low risk?
Ajay’s retirement is 18 years away and he wants to start a restaurant when he retires. It would cost Rs. 10 lacs today. He expects moderate inflation throughout the 18 years and he can take high risk, but wants to keep a
constant contribution for all 18 years. Based on this information, he will follow the 3 steps we discussed in this chapter.
Step 1
Find out Future Value
He looks at the first table and find out that the future value of his goal is Rs. 40 lacs (Rs. 4,00,000 for Rs. 1 lac, so for Rs. 10 lacs, it would be Rs. 40 lacs).
Step 2
Calculate how much to invest per month
Based on the future value of Rs. 40 lacs, he finds out from table that for “constant contribution” and
“high risk”, it would be Rs. 170 per month to generate Rs. 1 lac after 18 years, so he multiplies 170 by 40, and gets Rs. 6,800 per month.
Step 3
Where to Invest?
From the 3rd table, he finds out that he fits in quadrant 2. So he decides to invest Rs. 6,800 in those categories of products.
He chooses to invest Rs 4,000 in an equity diversified mutual fund and the remaining Rs.
2,800 in an index fund.
Down Payment of House - Goal Example 2
Robert wants to make a down payment for a house after 4 years; he is a low- risk taker. Right now, he needs Rs. 5 lacs to make down payment. Find out how much he needs to invest on a one-time basis as well as on a monthly basis linked to his salary (6% increase). He wants to assume that inflation will be high in coming years. Now let’s follow the 3-step process.
Step 1
Find out future value
He looks at the first table and finds out that he would need Rs. 1.47 lacs for every Rs. 1 lac today,
so he multiplies Rs. 1.47 lacs by 5 and gets Rs.
9.85 lacs as future value. Let’s take it as Rs. 10 lacs for simplicity.
Step 2
Calculate how much to invest for a one-time investment
He looks at the second table and gets the value of Rs. 73,500 to be invested on a one-time basis for Rs. 1 lac target, so for Rs. 10 lacs target he will have to invest Rs. 7.35 lacs (assuming low risk).
Step 2
Calculate how much to invest for a monthly investment
Assuming low risk and a salary increase linked situation, he would need Rs. 1,710 for every Rs. 1 lac target, so for Rs. 10 lacs, it would be Rs.
17,100 per month.
Step 3
Where to invest?
From table 3 - he can see that the quadrant he lies in is Quadrant 3 (low risk and short-term goals), so based on the options given there he can invest in:
For one time investment option - A fixed deposit of Rs 7.35 lacs.
For Monthly investment - A recurring deposit of Rs. 17,100 per month.
Your financial goals
Now in the same way you can also plan for your goals, for which you need to define:
1. Target year 2. Current value
3. Risk capabllity 4. Inflation assumed
5. Constant/increasing monthly option or one-time option
Note - If you want to invest on a yearly basis, then just multiply the monthly number by 12.
Making realistic and approximate assumptions
When we work with our clients, we observe two shocking things. One before goal planning and one after goal planning.
Before goal planning
Most people do not realise that they want the stars and moon while they live on earth. Their goals are just not realistic. They just do not see what their situation, earning and their capabilities are, and what they want out of their life. You need to look at your earning potential in future, your lifestyle, your overall knowledge and finally speak out a number. You can’t be saying that you want to plan for your kid’s education after 8 years and the current value you would need today is Rs. 60 lacs, especially when you are earning just Rs.
5 lacs per year. That’s just not realistic and you are destined to be unsatisfied in your goal planning.
No financial planner or advisor can help you unless you keep things in limit.
Hence, when assuming a target value, make sure you project realistically.
Don’t overshoot an estimate just because you feel that the planning process can overshadow your limitations. That is exactly how some of our clients also felt while sharing their goal numbers with us. They thought that just because they are hiring a financial coach or a planner, all their goals would be planned somehow. They think advisors have some magic stick that we will use to help them meet their goals.
Aftergoal planning
After you do some calculations and plan for your goals, you will get some numbers. In my observation, most people take it too literally and are attached to the number. They focus on the number, rather than the process or the concept.
Let’s see this example -
To generate Rs. 25 lacs, they need to invest Rs. 4,850 per month for the next 20 years and increase the contribution by 6% each year.
Now think about this carefully….
Is it really possible that the guy will get exactly Rs. 25 lacs after 20 years, if he follows this plan? Can’t the final number deviate?
The final value can be Rs. 22 lacs, Rs. 28 lacs, or it can be Rs. 20 lacs also! It depends on several factors. The calculations are done with some assumptions, which are just approximations, and what really matters is that you reached
“near” your goal, not the GOAL itself. A goal should always be looked at as a fuzzy area and not a point!
If the amount to be invested is Rs. 4,850 in this example, it does not mean you can’t invest Rs. 4,500 or Rs. 5,000. Also, you don’t need to religiously increase your investments by 6% each year. It can be a 20% increase every
3rd year. Or just a good enough Increase whenever it’s possible; ultimately you are going to do things within your limits.
Don’t cancel your SIP in mutual funds after 1 year and add 6% to the amount and restart the SIP, that’s planning overkill. What it really means is that you should keep your investments later by a good margin, instead of increasing it by 6% each year, or whatever works for you.
So don’t be attached to each number and strategy so rigidly that instead of helping you simplify things, it becomes a burden for you and blocks you from taking the right actions.
What to do in subsequent years
So you have planned for your goals and now you know how much money you need per month or on a one-time basis to invest for all your goals. Now you might have that much money at this moment, or you might be short of money by some amount. Again, don’t stop.
As I said, don’t block your actions because of numbers. If you have just 50%
of what is required to meet your goal at this moment, at least start.
By now, at least you know that you are 50% short of the amount. After 2 or 4 years when your situation improves and you are able to invest more than what is actually needed, you can always cover up for the past and invest more. At that point of time, you can always redo this whole exercise and get the fresh numbers. It’s not a one-time exercise, it’s a yearly exercise you should do and check if you are on track or not!
Take this whole goal planning as an exercise to help you in starting and push you for taking action. At least after this goal planning you now have a better idea of what you need to do about your financial goals; you know which direction to move. The whole process is the real essence of financial planning, it’s not about numbers; it’s about the process and the action you take. Remember - It’s not just about numbers!
Action Time
Now finally let’s work on your numbers and put some action items. Fill up the following table.
Bonus Tips
• In case you have planned for a long-term goal, it’s always a good idea to start withdrawing from your investments 2 years before the goal in case your money is lying in risky investments like stocks, mutual funds or ETFs, and transfer the money to safe instruments like a fixed deposit.
• Do not be too attached to the tables and strictly follow them. Use your creativity and choose some investment options that you feel can be a good alternative.
• Plan for a goal with a worst and best case scenario, and try to match the best-case scenario. This way the chances of you meeting the goal will be high, because you are saving with the best possible scenario!
The sixth step in your financial life is to think about your retirement planning and start working on it now. Retirement planning is one of the major goals in life and should be taken very
seriously.
This chapter is dedicated to retirement planning, an alien concept in India.
Retirement is generally not planned, it just happens in our country! Have you ever seen your parents or grandparents think and talk about their retirement as carefully as they think about other things in life like building a home or planning for a grand wedding?
For decades, retirement was a phase of life where parents depended on their children to support them and take care of them. The attitude was, “I have done my bit, now it’s your turn.” While that attitude is acceptable, is that the right approach towards retirement, especially in current times?
One has to look at cultural and societal changes in our country and look ahead to visualize the future. With an increasing number of nuclear families and growing trend of families parting with their main families, it’s highly probable that when your retirement arrives you will need to take care of your own life. No doubt your children and loved ones will be around and support you if needed, but you cannot deny that ultimately your retirement is in your hand and you cannot take it for granted.
Times are changing! You need to change your mind set too
Because of the old mindset, it’s really tough to imagine your retirement as totally in your hands, and because of that, most people cannot digest that retirement planning has to be one of the top most goals of their lives.
Whenever one hears the word “retirement”, the thought that comes to mind is, “There is enough time ahead” and this way months and years pass on. One day they realise that they have done everything for their children and family, and completed all the responsibilities of life, but have terribly forgotten about retirement planning. All their life they have earned and spent it on others, but now when their time has come, they do not have enough money to survive a fulfilling life.
In his landmark book, “11 Principles to Achieve Financial Freedom”, Nandish Desai explains, “There are some financial goals in life which we set and then there are some goals which are already set by themselves, the moment we take birth. One goal that is already set from the moment we enter this world is retirement. You don’t have to set the goal, you have to just set yourself now”.
It will not matter if you have planned for it or not, it does not matter if you are doing anything about it or not. The retirement monster is sitting there years away from you, staring at you, laughing at you, it’s fixed! You are approaching it each year, each month, each day, each hour and each second, very slowly! That’s the reason you do not realise this hard fact.
You don’t set the goal of retirement. It’s already SET.
Now you just have to prepare yourself.
Retirement in new India
Different people have their own definition of a word “retirement” where it means “free from responsibilities” or “not working anymore”.
But what is your definition of “retirement”? How do you “visualize”
retirement? Is it just getting free from responsibilities and the end of your working life, or it is much more? Mostly you see it as a phase of life where you no longer have to work for money. You might be doing some work, but it’s not dependent on the money you get. It’s a phase of life where you live a life you were waiting for all life: relaxation, freedom to get up in morning at any time and do what you want all day. Travel somewhere without thinking about your commitments etc.; in fact, you are so excited just reading this paragraph that you are literally imagining yourself doing all these.
In the book “Retire Rich - Invest Rs 40 a day,” a dedicated book for retirement planning, author P V Subramanyam says that “Retirement is a time bomb waiting to happen!” That’s extremely true at least in the Indian context, where people underestimate the retirement requirement so much.
Let’s get the facts right - Retirement is not an easy thing to plan for and you are surely underestimating retirement needs.
If you didn’t think like that, think again! The goal of retirement is not a fixed point, it’s a phase that will go on for years and years until you die. There is enough proof around you. Look around you; see the people who are retiring these days, what are their lives like? Full of struggle? Are they dependent on someone financially? If you are struggling financially right now in your life, imagine the days when you will not be earning and your health will not be as good as it is now.
You are earning for your past, current and future
The money that you earn today, what is it used for? Most people will say - for present expenses. Yes, that’s true, almost everyone used their income for current expenses, but some people also use it to repay back some debt from their past. Most people do not get this fact in their mind that what they are earning today is the only money that they have to use in future also–that’s retirement.
30-30 rule of retirement
Let’s understand a rule called “30-30 rule of retirement”. The rule says that you will earn for 30 years, but you will use the money for both 30 years of earning + 30 years of retirement. Let me explain more.
If you are earning for the next 30 years of your life, you will use the money you have earned in those 30 years in that 30 years’ time frame, but what about the next 30 years of your retirement? Many people struggle to meet their expenses with what they are earning today. Imagine a situation when you still have 30 years to live, and you are not earning. The situation is much scarier than you can visualize!
What about the money that you will be using in those 30 years of retirement?
I would recommend that from today itself, when you get your monthly salary, keep it on the table and try to take a part out and see it as a retirement expense, which you will have to incur in future. It’s the expense of future that you are saving in this current moment. Bring your retirement into present and see it parallelly with your current life, see that each year of your working life is mapped to each year of your retirement life. Most people see a retirement life AFTER their working life, which is correct in a way, but for a better perspective, look at each retirement income parallelly to your each working year, and tell yourself:
“Hey Your-Name-here, for the year 2013, there exists a year 2043 (30+
years), where you will need money to spend, but you will not be earning
anything, so better keep aside some money in 2013 itself thinking about future. Same for 2014-2044, for 2015-2045 and so on”.
A year lost = more pressure on retirement life
For every year and every month you do not save for future, you are short for that particular retirement year. Your time left for retirement decreases, but you still have to save more and more with each passing year. This is a really serious issue. Close the book for a moment, shut your eyes, think about your age 60-90 years from now and imagine each day, each desire of yours that you will fulfill in retirement, each wish you have saved in your heart, each plan you have for your retirement and stop. Only you are going to fund it, no one else will give you money for it; if someone gives to you, that’s great, but can you take the risk of not planning and just live on assumptions?
You earn for 30 years, but you need to use that money for 60 years - 30 years while working and 30 years in retirement. So use