Before you prioritise your goals, it’s important to categorise them into short-, medium- and long-term...
Before you prioritise your goals, it’s important to categorise them into short-, medium- and long-term, keeping in mind the current situation, future needs and wants.
Make a budget
Often, we don’t realise how much we spend on avoidable expenses. Note down all expenses above a certain amount. The limit could be R1,000 or R5,000, depending on the individual’s income. A summation list of expenses at the end of the month can be enlightening, to say the least. For example, the total amount spent on eating out or entertainment, when calculated at the end of the month, can make a significant difference to your next month’s budget.
Consumption and investment expenditure
Most of us have an endless list of lifestyle expenses. However, you should be prudent with your spend and understand the difference between consumption and investment expenditure. This can be done through a grasp of how expenditure might affect the family’s ability to fulfil its other financial goals. The trade-offs should be clearly understood. Some outflows, such as children’s education, may appear to be consumption expenditure while actually they turn out to be useful investments. Such expenses should be carefully prioritised.
Decide strategically your allocation into equity, debt, liquid funds, etc while considering a particular financial goal. A monthly summary of outflows will help you understand the current order of priorities. If unusual expenses are kept out — for instance, a hospitalisation that was not covered by insurance — the balance outflows can be categorised as retirement savings, loan servicing, essentials and lifestyle expenses, which may vary across families.
Syncing goals with time
Some financial goals need to be met within a specific time-frame. For instance, children’s education has to happen within a particular time period. A child’s higher education cannot be postponed because money isn’t available at the right time. Other financial goals may have to be deferred to ensure that a critical financial goal is not compromised. For instance, around the time the family proposes to buy a house, a car purchase or holiday may need to be reviewed. Remember, too many financial goals around the same time may prove challenging.
Many people believe that the provident fund (PF), superannuation and gratuity corpus they will receive on retirement will be adequate to ensure a comfortable life in retirement. Most of the times, it turns out to be inadequate because you haven’t given a serious thought to inflation and other economic factors. Therefore, a retirement plan should be part of every one’s list of goals. The main objective should be to ensure that your savings are enough to last your retirement life.
Capitalise on windfalls
Sometimes you may earn an unexpectedly high annual bonus, or even hit the jackpot if you are in luck. The chunk of such unexpected income should be set apart for the future. These are situations when you should take a look at the outstanding loans, and even consider pre-paying some of them. In fact, many other needs can be fulfilled through this unexpected inflow of money, but do it tactfully.
* Decide strategically your allocation to equity, debt, liquid funds, etc while considering a financial goal. A monthly outflow summary will help you understand the priorities
* Too many goals around the same time may prove challenging
* While planning for retirement, ensure that your savings are enough to last the twilight years
By Vishwajeet Parashar
The writer is group head, marketing, Bajaj Capital.