Easy way to plan your finances

Financial planning is about setting goals and allocating your resources towards achieving them. However, investing for most is an activity to be indulged in 'as and when' funds are available, i.e. it's a sporadic, directionless activity.

If your means are flawed, there is chance that so will be your ends. Don't expect to land up with a significant amount of wealth if you conduct your investment activity in spurts.

The key to successful investing lies in regularly setting tangible, realistic goals and working towards them. Keep multiple goals which run across various time horizons, e.g. planning for a vacation one-year hence (short-term), buying a car (medium-term) and a long-term one like buying a house.

• How to plan your finances - I
• How to plan your finances - II

With these goals come concrete numbers, now you know precisely how much money you need to achieve those goals.

Let us better understand this using an example, say in a three-year period you want to buy a car which is presently worth Rs 300,000. Assuming that the price of the car will rise at an annual rate of 8 per cent, the cost at the time of purchase would amount to approximately Rs 378,000.

Now that you have a clearly defined objective, the next step is to start planning your investments.

Diversified equity funds and balanced funds can be deployed to achieve the stated target. A well-managed equity fund should be able to deliver around 12 per cent returns on a CAGR basis (over a three-year period); similarly the returns for a superior performing balanced fund could be in the range of 9-10 per cent.

Driving towards your goals

As is evident from the table, acquiring that car would imply investing Rs 115,000 per annum or approximately Rs 9,500 per month.

Thanks to your plan now you know how much you need to put aside each month; the clear perspective in turn imparts the much-needed discipline in managing your finances. It works as an incentive to abstain from squandering your resources on wasteful activities.

Some may feel that putting aside the requisite amount, i.e. Rs 115,000 every year is not a feasible option. In such a case one could explore the possibility of toning down his/her expectations and opting for a lower priced vehicle.

Alternately the option of giving oneself more time (which in turn would involve lower investments) could be considered. This brings us to another important aspect of setting targets; give yourself enough time, it always enhances the possibility of meeting your goals.

At times, you may feel the need to let ends justify the means; say you are planning for a holiday one-year hence and are starting off with a modest investible surplus. In such a case equities and equity-related instruments might be your best bets (though we would not advise anyone to take a one year view on stocks).

For a risk-averse investor, the choice can be a tough one. Should you ignore your risk profile, etc, in such a situation, let the gravity of the objective provide you with the answer.

You can afford to miss out on taking a vacation vis-à-vis missing out on creating a corpus to buy a house. If inevitable, in such a case, go ahead and take that additional degree of risk, it might be worth the effort.

While setting targets may be an easy task, getting your asset allocation right to meet them can prove to be difficult. This is where qualified and reliable investment advisors can play a vital role.

Remember it's vital to set objectives and working towards getting there, because that's where you will land up!

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