Everyone has goals in life — financial, personal or otherwise. Some may want to build a large retirement corpus, others may want to travel abroad every year, and yet some may want to buy luxury cars. However, setting goals is only one aspect of the story — the key to a successful financial plan is to ensure that it is realistic and within reach. Normally, while setting a financial goal, people consider their existing income levels and take into account their spending habits. However, most people forget to consider important areas such as inflation, taxes and a suitable investment portfolio. It is advisable to take into account all these factors as well before making the financial plan as, without these, no financial plan will be realistic.
Inflation: You are not spending the same amount of money today as you used to spend two years ago for purchasing the same goods and services — you are spending more. The obvious reason is that prices have increased over the period. Prices rise over time due to inflation, and this can erode one’s returns. For example, if a fixed deposit returns 8% and inflation is 6%, the real return that one makes is only 2% (i.e., 8-6%).
Inflation can also affect one’s savings goals and impact the investments required to reach this goal. This is because the prices of goods and services go up over time. For example, if one wants to take a foreign holiday in three years, and assumes that the required amount is R3 lakh without taking into account inflation, the actual cost will be much higher. Hence, it is crucial to factor in inflation into one’s financial plans to ensure that savings and investment beat inflation.
Taxes: Another important factor that people forget while making a financial plan is their tax outgo — it is always advisable to choose an investment that gives good returns at a low tax rate. The final return is called tax-adjusted return, and unless this figure beats the rate of inflation, the investment will not yield any real returns over the long term.