Chart Your Own Financial Destiny

Updated: Nov 9 2003, 05:30am hrs
N B Singh, a mid-ranking officer with the Ministry of Agriculture, Government of India, is about to retire in December 2003. Though his present take-home salary pales in comparison to some corporate executives half his age, he does not lose sleep over his financial security. For, he is assured of nearly Rs 10,500 as monthly pension and also he has accumulated nearly Rs 10 lakh through his non-contributory Provident Fund, that not too long ago offered an interest rate as high as 12 per cent.

His retirement kitty will also swell by a decent amount from gratuity. He says: I never heard of financial planning nor did I plan my finances, but I am happy with the way things have turned out for me. But he belongs to a generation of people who lived in an era of assured returns. However, things are changing fast. Because of changing economic realities, such an attitude may not take one very far.

Sample this: Gaurav S, a 30-year old executive with an MNC earning Rs 45,000 per month, is a worried man. Take a quick look at his balance sheet and you get a picture of a young man whos got anything but his financial act together. He spends one third of his salary on rent, Rs 6,500 on a car loan, and often has to fall back on revolving credit through his credit cards.

Moreover, the fact that he is married is also demanding on his finances. Im no more a single he bemoans. And I cant spend my money only on beer and parties anymore like my bachelor days. No wonder he feels that his salary barely suffices for his day-to-day expenditure in a city like Mumbai. Also he has to take care of his dependent parents. And, not surprisingly, he and his wife Smita, are hardly able to save anything at the end of the month.

While some of these problems may be peculiar to Gaurav, the following economic realities are likely to change the way most people think about their personal finances. The economic trends that will force us to worry about our financial health are: Falling interest rates, rising life expectancy and inflation.

Falling interest rates: Interest rates on small savings have been cut four times in as many years. They have fallen from 12 per cent in 1998 to 8 per cent in 2003. For most people, these savings avenues have been a safe haven. The media has gone to town and much has been made of the fact that the Sensex, the benchmark index, has crossed the magical figure of 5,000.

However, it must be remembered that a recent Sebi-NCAER survey of Indian households showed that only 9.8 million households are investors compared to the total number of non-investors which nears a billion.

Moreover, according to the Annual Capital Market Review 2003 by the BSE, the share of household savings in shares and debentures has fallen from about 13 per cent in the early 1990s to about 2 per cent now.

However, what has taken most investors and savers by surprise is the quantum of cuts in small saving schemes.

This has shocked investors and savers alike who have been living in a world of high-assured returns in government-backed schemes.

With falling interest rates, it makes sense for people to search for investment opportunities elsewhere. Since most people are still wary of stock markets and not equipped to invest in them directly, there is a need for other alternatives depending on the persons needs and preferences as to asset allocation and channel of savings.

But going by the experience of developed economies, and the recent happenings in India, it is inevitable that funds will have to move from the traditional savings accounts and fixed deposits, to other avenues.

Rising life expectancy: Life expectancy has gone up to 63.87 years thanks to better healthcare and other support facilities. This is in line with that of other countries where the median age of population has been rising. Therefore, as people live longer, they will have to take care of themselves in their old age.

Though the joint family system is far from over in India, there is no denying the fact that nuclear families are here to stay. With improved healthcare allowing people to live longer and the post-liberalisation boom and the attendant profusion of choice will force many people to seek professional help to manage their finances.

But as the population ages and the average lifespan increases, people are also becoming aware that their retirement security and comfort will depend more on them and their financial planning efforts, than on government welfare benefits. Thus, people will have to take financial planning more seriously.

Inflation: Though the current inflation rate stands below 5 per cent after having climbed down considerably from the double-digit figures in the early 1990s, the figure is a bit discomforting for a pensioner or a salaried person. Do not underestimate inflation even if it is below 5 per cent currently. Inflation corrodes the value of your earnings.

For example, if you earn Rs 10,000 every month and the inflation rate is say 5 per cent, then because of inflation your income would buy you goods worth only Rs 9,500 (i.e Rs 10,000-Rs 500) instead of the Rs 10,000 worth of goods that you could have bought last year.

Moreover, a rise in cost of living is not directly related to the rise in the Wholesale Price Index (WPI) or even the Consumer Price Index (CPI).

Thus, even at this low rate, inflation eats up returns from your savings from a range of instruments that offer 6-8 per cent at best, leaving you with a real return of just 1-3 per cent!

Lastly, as India marches on towards achieving a developed nation status, there will be a move to align our taxation system with the rest of the developed world. Gradually, there could be a move towards complete withdrawal of tax benefits too. The Kelkar Committee recommendations were one such timely reminders.

Moreover, certain personal events such as loss of job, illness, accident or even death of a related person can precipitate a financial crisis. The best way perhaps would be to be aware of these facts of life and plan out things accordingly.

As Stephen Covey, the author of the best-seller Seven Habits of Highly Effective People has put it aptly - Begin with the end in mind. Thus, financial planning can help you achieve a fair degree of financial success if you can visualise your life goals.

So what is this term financial planning Well, to put it simply it is the process of meeting ones life goals through the proper management of ones finances. Surveys in India have indicated that for most people, these goals revolve around: Buying a house, a car, saving for the daughters marriage and/ or childrens higher education and planning for retirement, not necessarily in that order though.

Most of us are justifiably reluctant to handle our own money. In some cases it is the lack of expertise and in others where expertise isnt a problem, it is the lack of time.

However, as can be seen from the above i.e getting started financial planning is definitely not rocket science. In fact it is about loads of common sense and a disciplined approach towards saving and investing.

Getting Started
The process of financial planning involves setting life goals, evaluating your current financial status and drawing up a strategy or plan to meet life goals and to review the status periodically. The following four steps help you understand how to get started towards a more secured financial future.

Define Your Financial Goal
It is common to hear from people that their goal in life is to lead a happy and successful life. However, such a vague goal is anything but helpful while planning your financial future. Therefore, the first step is to define and quantify your goals. For example, if you want to buy a car in the immediate future and also want to have a happy retired life, then you must categorise them into short-term and long-term goals respectively.

Decide how much you need to save for the down payment of your car by having a specific rupee amount in mind. As for retirement, you can choose the projected amount for the time when you retire. Or you could choose to devote a fixed percentage of your income for your retirement fund.

Suppose you intend to retire in the next 18-20 years, how do you go about estimating the future cash outflows and making provisions for them Let us assume that you will need at least Rs 30,000 per month to sustain your current style 30 years hence. So how much should you save

Assuming the same levels of inflation, you would need to save Rs 36,000 a year and manage returns of 8 per cent. Thus, after 30 years, you would have managed a sum of Rs 44,65,625 and investing this sum @ 8 per cent will fetch you approximately 30,000 a month.

Save With Discipline

While experts, self-help books, pink papers or magazines will give you ample advice, it all boils down to a self-discipline in terms of savings.
Investing a fixed amount of money at regular intervals, for instance on a daily, monthly or annual basis, gives you the benefit of rupee cost averaging, a good investment technique.

It also gets you in the habit of planning for your future. You can try to save at least 10 per cent of your salary for a particular goal in mind. Or try to save a fixed amount, say Rs 2,000 or Rs 3,000, per month. The best way is to save whatever you can, even if it is just Rs 100 or Rs 500 a month. The more you can save, the better off you will be.

Make Time Your Ally

Remember you are in race against time. You have to achieve your financial goals within a given timespan. Make time your biggest ally. Put the power of time to work for you.

The sooner you start saving, the more time therell be for compound interest to build up a decent fund for you. A person who saves at least Rs 3,000 a month for 30 years would have accumulated a tidy sum of Rs 98,65,680 if invested at 12 per cent.

Assess Your Finances Periodically

It will be naive to believe that financial planning is a one-time affair or to assume that it gets triggered only after a crisis. In fact, such a kneejerk reaction takes you nowhere.

In fact, things around you are so fluid and dynamic that things can change overnight. In case you have borrowed money for that dream house of yours and even that favourite car parked in the garage, benign rates of inflation may suddenly wreak havoc with your finances if they move up sharply.

So try and asses the ever-changing economic realities and be ready for them.