Financial planning does not imbalance your budget

The challenge is to ensure that the outlays towards the financial plan do not post an inordinate burden on your budget. Here are four steps for a smooth journey.

Apr 07, 2019 12:04 IST India Infoline News Service

FINANCIAL PLANNING
One of the realities about financial planning is that it has a cost. To plan your future, you need to set long-term and medium-term goals and then make money work hard for you. Once the future value of your goals is identified, work backwards and see how they fit into your regular budget. The challenge is to ensure that the outlays towards the financial plan do not post an inordinate burden on your budget. Here are four steps for a smooth journey.
 
Step 1: Use the most efficient tool to reach your goals
 
Any goal plan is a trade off in two ways. It is a trade-off between instant consumption and future value. That is a call you need to consciously make. Secondly, maturity of your goal decides the asset mix. Amit needs to create a corpus of Rs1 cr for his daughter who plans to study abroad after 15 years.
Details Corpus Needed After X Years Invested in CAGR Yield Monthly SIP
Plan A Rs1 cr 15 years Equity Funds 14% Rs16,507
Plan B Rs1 cr 15 years Multi Cap Funds 15% Rs14,959
Plan C Rs1 cr 15 years Balanced Funds 12% Rs20,017
Plan D Rs1 cr 15 years Debt Funds 9% Rs26,427
 
In the above case, equity will be the ideal option. Generally, the risk of negative returns is eliminated if you hold equity funds for more than 8 years. Since the time frame is 15 years, equity funds or multi-cap funds will give the best risk-return trade-off. It will also ensure minimal pressure on your monthly budgets without compromising goals.
 
Step 2: Treat savings as a target and not as a residual
 
Once your targets are known (you need to do a multi cap SIP of Rs14,959 per month) plan to save smartly. If you wait for you income to grow till you can afford this SIP, it will never happen. Reverse the order of thinking. Set the SIP as your target and work out expenses based on that. We will see this point in greater detail in the next step.
 
Step 3: Analyse your budget and cut corners where possible
 
There are a lot of leakages in our monthly budget. There are expenses we believe are uncontrollable but can be reduced to make a substantial difference. For example, are you spending too much money eating out? By reducing your eating out from six times to 3 times a month, you can save at least 25% of your monthly SIP requirement. If you are surprised, just try it out. Secondly, make the best of discounts and bargain sales. When sellers are desperate to free up shelf space, you can make do your budget a favour. Get into the habit of ordering everything from groceries to cosmetics to hygiene products to clothes online. When you shop at a mall, you let your wallet slip. You can save at least 20% of your monthly costs this way. Lastly, keep a tab on your fuel costs. In metros, that is a big cost. Shared cabs and public transport were created to reduce your cost. Make the best use of them.
 
Step 4: Structure your savings in sync with payouts
 
Let us get back to our multi cap fund example. You are required to save Rs14,959 per month to reach your target of Rs1 cr in 15 years. But you don’t need to pay Rs1 cr at the end of 15 years. You will instead pay Rs25 lakhs each at the end of the 15 years, 16 years, 17 years and 18 years, considering a 4-year course. Break up into 4 multi-cap SIPs of different tenures and your total monthly SIP comes down to Rs11,894. You are effectively reducing your monthly SIP requirements by Rs3,000 without compromising on your goals. Secondly, we buy term insurance to protect against uncertainties. As each tranche is paid, reduce your term insurance proportionately. You will also save a tidy sum on premiums.
 
You can actually reach your goals by tweaking your budget and your thinking moderately. You actually don’t need to sweat about your financial goals!

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