Ever joined a gym? Remember what happens? Let me help you with this one.
It is with a deep sense of realisation that you join a gym. It is a realisation about your health and how only you are responsible for it. The thought lingers in your mind for days, sometimes even months; it is only then that you finally join the gym.
The years of neglect make you fearful about your health. When you join the gym, you are brimming with enthusiasm and want to wash all your sins overnight. On the first day itself, you pick those heavy weights. By the time your session ends (how you want to push an extra hour!), you are already comparing yourself with Hrithik Roshan or Priyanka Chopra, as the case may be.
The enthusiasm stays for some days, then starts tapering. By the time a month is over, you have already missed 5-7 sessions. Fear gives way to justification -- 'I was busy with office work', 'Nothing can happen to me'. In fact, you have no dearth of excuses.
From the second month onwards, you are convinced you do not need to go to the gym. After all, you can do what the instructor has taught you. At least that's what you think.
The same logic applies when it comes to managing your money; you start with a lot of enthusiasm but it tapers off over a period of time.
However, if you are disciplined enough and are a stickler for a plan, here's one that will help you amass great wealth over the long-term. Implementation, of course, is your responsibility.
1. List incomes and expenses
Understand that saving is not the only way to get rich.You need to bring in more money and invest it properly. Since there is a practical limit to that, what you can do is cut down on your wasteful expenditure and invest your savings wisely. It is not how much you invest, but for how long you do it, that matters.
List all your incomes and expenses (the operative word here is 'all', especially for expenses). This will give you an exact picture of where your money is going.
2. Prioritise expenses
Once you are ready with a list of your income and expenses, identify the expenses you can cut down on. Invariably, I have found with my clients that investments are their last priority -- 'Agar kuch bachta hai to usko invest karte hain (If there is some money left over, we will invest it.' What I suggest to my clients is they give the topmost priority to investments.
The amount that you start saving and investing should not matter in the beginning; inculcating this habit should. Over a period of time, I have noticed that they themselves start making an effort to increase their investments.
3. List assets and liabilities
What you want is a high net worth and ample liquidity (cash in hand). Net worth refers to the assets you own minus your liabilities. One big housing loan can drag your net worth in the red.
Similarly, huge investments in instruments such as public provident fund or fixed deposits may keep your net worth positive, but it won't grow at a fast clip. The return you get on these mode of investments are less compared to, say, returns from the stock market.
Of course, investment avenues depend upon a lot of factors and will vary from individual to individual.
You need to do is make a conscious effort to increase assets (depending upon your risk-taking ability), reduce liabilities and keep a healthy liquidity (that is, you should typically keep aside three months of expenses).
4. List goals
All this is being done is with certain objectives in mind. So list all your objectives. Attach a money value to these objectives. Assess the time when each of these will materialise.
Let us say a marriage costs Rs 10 lakhs today. Assume that the cost of marrying your children grows at a rate of 8 to 10 per cent every year (slightly higher for education -- around 12 per cent).
Now, calculate the projected value after the number of years it will materialise for you, that is, if you have a daughter/ son who is seven years age and you see her/ him marrying at the age of 24 years, then you still have 17 (24-7) years for your goal to materialise.
Assuming that costs increase at 10 per cent per year, the Rs 10 lakhs you need for the marriage will have increased to Rs 50.54 lakhs in the next 17 years. So, you have to invest such an amount today that it will grow to Rs 50.54 lakhs in the next 17 years.
To achieve this target, assuming returns at various rates, the following lump sum investments need to be made today.
| Investment |
Rs 13,66,066 |
Rs 736,155 |
Rs 405,405 |
Rs 227,821 |
|
Rate |
8 per cent |
12 per cent |
16 per cent |
20 per cent |
In case of a SIP @ 14 per cent per annum return for 17 years, the minimum investment/ month only for this goal (Rs 50.54 lakhs) would be Rs 6,100. The importance of starting early can be seen from the fact that if you start investing the day when your son/ daughter is born, you will have to invest Rs 4,200 to achieve the target.
These figures may sound outrageous but the fact remains that, if you are prepared for the worst case, you will never face the risk of a thud landing. For all the talk of inflation below 5 per cent, I have seen egg prices go up form Rs 0.5 to Rs 2.5 per egg in the last 10 years. That's an increase of 400 per cent in 10 years. Now, do the above figures seem absurd and outrageous to you?
5. Stick to a plan
This is the most difficult part. It is like asking for the moon. This is when you decide whether you will continue with the gym for a second month or your justifications get the better of your will power and discipline.
Once you have your plan in place -- insurance, investments, goals, etc -- how you will stick to it is what matters.
If you manage your salary, month after month, in line with your plan, it will go a long way in helping you achieve your financial objective. The question you should answer is how badly you want it.
Financial planners can only develop plans for you. To implement them or not is solely your responsibility. After all, it's your money and you should be more passionate about it than anybody else.
The author runs a Nagpur-based finance advisory Money Bee Investments. He can be reached at moneybee.finplan@gmail.com.