Back to the Future
Start point: SIP- Stop, Introspect and Proceed
Every bread winner in a family will strive to earn enough for the present life and yearn to plan for the future. He is pre-occupied with so many priorities in life that he loses the count of the pending issues. In such a myriad situation, he wonders how much I should save and for how long? He cannot distinguish between his savings and might have multiple goals. Present day man is not a Spielberg to keep travelling in the time machine back and forth from the „present‟ to the „future‟ to understand the time value of money. Whatever may be the price of a “Masala Dosa” or “Colgate paste” he knows that it is becoming increasingly unaffordable. He reminds himself every time like “Gajini” whenever he eats a dosa or may be when he brushes his teeth. Our parents and grandparents in those days procured the „provision items‟ once a year and did not worry about prices on daily basis. In the current decade, we stock „provisions‟ for a week and hence we encounter the price fluctuation frequently.
Present day man knows that he has to save; he knows that it generates return but not exactly as predicted; he knows that expenses grow far more than he expects; he knows that it cannot be predicted; but still wishes to do something today. He becomes desperate and ends up doing something that is not adequate. He needs to overcome these 3 challenges
First Challenge – Money Tense
The investor needs to understand that the money he earns has to be segregated for various purposes. All the money that they earn does not belong to the current period. They need to monetize their income into „Present Money‟ and „Future Money‟. For every Rs.100 earned per month, they need to segregate it as
Primary needs such as Rent/EMI, household expenses and taxes Secondary needs such as retirement and family goals (education, marriage etc) Finally for lifestyle expenses.
Investor should get a feeling that what is meant to be saved for „future goals‟ is not to be construed as part of the current period income. If they end up using future reserve money for today‟s expenses then they will soon go bone-dry in their finance (While the PF money saved is „future money‟ but it is very inadequate). Single bread winner has more challenges when compared to double income families.
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Your primary and Secondary Budgeting: The pie chart depicts the ideal break-up of money usage. So out of every Rs.100 you earn, please keep aside 25% towards future goals. You can start with a smaller allocation and do a catch-up before you reach 35 years of age, otherwise you might have extended work-life!
Nature of Expenses
Rent / EMI
Second Challenge – Quantum of Solace
The challenge in planning for the future is not just setting aside some money but about saving the right amount in the right asset-class. So get your quantum of investment right (based on income profile and dispoable income) followed by how long to invest (goal period) and where you need to save (risk appetite). However one point to remember is that “How much time that you give to your investment is a key determinant to success and also defines your risk”.
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For example, debt or bond can be risky if your time horizon is 3-6 months but ideal for 1-2 years. Similarly, largecap stocks or fund can be riskier for 2-3 years but ideal for 7-10 years....
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