5 financial planning steps to prepare you for various life stages

Managing your money to put it to best use is as important as earning it is. Your surpluses need to work for you silently even as you set out every morning to earn that extra bit. However, money management is not everyone’s cup of tea. For many, it is a daunting task, better left for some other day. Well, money management is not as difficult as it appears to be from all the financial jargon associated with it.

To start with, everyone should have a well-defined financial plan. The earlier you start building a portfolio for your future needs, the more secured you are likely to be at each of life’s turn. You should have the foresight to understand the various life stages and the financial needs associated with each of those stages. Not working towards having enough in your kitty for those life stages could leave your family’s finances in a mess.

We apprise of you of the various life stages and how to go about planning for them:

SET OUT GOALS
So, what is the best way to try to take care of your future financial needs? Perhaps the best way forward is goal-based planning which involves creating a financial plan tailor-made for your life goals. This would mean that you make the surplus money work for you even as you set out daily to earn a little bit more. You must have a well-structured investment plan in place aimed at creating the corpus that would be needed to meet each of the life’s goals.

The goals early in your working life could be to buy a car or a house. As you go along the goals are marriage, buying a home, planning for a family, your children’s education and to have sufficient left in hand to meet the needs of your retirement years. And sometime during the course you might have to provide support to your aging parents, just in case they missed out on having a plan of their own.

You have responsibilities throughout, both towards yourself and your family. You need financial security to sail through each of these stages of life with ease. Having a financial plan for every goal creates a sense of security. A well-structure plan, with a good portfolio mix, will definitely work to your advantage in the long run.

BE AN EARLY BIRD
Having definite goals as your financial milestones has several advantages over a general investment plan that does not keep in mind the life stages and finances needed at each of them.

One of the biggest advantages of goal-based planning is that it helps you to start investing early. The desire to achieve the targeted corpus would also likely to make you more disciplined in saving and investing for the future. The net result is that you would most likely achieve your investment goals.

The earlier you start your plan the better. Procrastination will only result in slipping in your investment targets. It is always good to remember the stunning power of the effect of compounding. A saving of 10,000 at a 7% compounded annual interest rate would grow to Rs 14,025 after 5 years, Rs 27,590 in 15 years and Rs 76,122 in 30 years!

Goal-based investing would also lead you to select your investment instruments carefully so that the asset allocation in your portfolio matches your time-horizon for each goal.

FACTOR IN INFLATION
The money lying your bank or in your pocket is a source of great comfort. But as time passes the value of idle money depletes due to inflation. As the value of goods and services rise, the purchasing power of every unit of your currency decreases in the same proportion. The purchasing strength of Rs 100 today would be reduced to Rs 78.35 after 5 years at an annual inflation rate of 5 per cent. On the other hand the good that cost you Rs 100 today will cost you Rs 127.63 after 5 years if it rises at the same 5 per cent rate of inflation.

Thus, if your monthly household expenses today are Rs 15,000, you would require Rs 19,144 a month 5 years from now to maintain the same standard of living assuming a 5 per cent inflation rate. And, this is just looking ahead 5 years! Think of what the expenses will be when you retire and the monthly salary cheque flow ceases. Your needs and your responsibilities would only increase as you travel the life path.

BE THERE FOR THE LONG HAUL
Creating a definite investment plan for yourself means you will be locked-in for the long haul. It would mean pooling your savings into separate instruments to help them grow for your future needs.

Those looking for short-terms gains are most likely burn their fingers and erode their wealth through impulsive and faulty decision-making. Even if you have a liking for the stock market, you need to remain invested for a long duration to see meaningful gains by riding through the market cycles. It helps investors not to panic in terms of market crisis and checking out of their investments as knee-jerk reaction. One must remember how markets rebounded a few years after the crash resulting from global crisis of 2008. Those who panicked and dumped equities altogether would have lost out on making substantial gains in the long run.

Having a long-term financial plan would mean you have set aside enough for the house that you plan to buy, and later to pay for the children’s education and finally building a decent kitty for your retirement. As we pointed our earlier, the power of compounding will always be in your favour if you are invested for the long haul.

DIVERSIFY YOUR RISKS
Risk appetite varies from investor to investor depending on factors ach as age, responsibilities, time-horizon and accumulated saving. As you grow older, your responsibilities rise and your ability to take risk with your financial assets declines. A young person in his late 20s or early 30s would have high risk appetite given the long years ahead for earnings. Hence, investing a larger proportion of savings in investments that carry greater risk such as stocks is advisable. However, as one grows older and finally nears retirement, the money needs to be gradually shifted towards less riskier, fixed-income instruments so as to obviate market risks.

A well-diversified portfolio, where your money goes into different baskets, with each aimed at specific needs such as buying a house or paying for your child’s education is one of the ways to ensure your goals are met. It is never wise to put all of one’s savings into a single asset as each asset class such as stocks, fixed-income and gold, have their own cycles. In a portfolio concentrated on a single asset class can dip all of a sudden sending one’s targets haywire.