As discussed in an earlier post we need to spend money in order to get certain things done. The range of activities can range from the mundane such as grocery shopping or paying the school fees, to the exotic such as an extended vacation in Australia or Europe. In simple terms any defined activity whether current or in the future can be termed as a goal.
However, from a planning purpose it makes sense to term only the significant activities as the life goals. So, the admission of your child to a top college should be a goal, whereas his/her studying in a school is probably less so. This also links to the mapping of life goals to financial ones. For the child’s school, one will normally pay for it through one’s monthly salary. For the college expenses this may not be possible. Viewed in this perspective any life goal / financial goal should satisfy these:-
- It must be a significant event in the context of you and your family.
- The amount in question is significant and cannot be met through regular income. It needs to be planned for.
Now the significant events that we are talking about can be short term or long term. You may want to buy a car in 3 years and your child may be going to college in the next 10 years. Both of these require a plan but these will differ from each other. Let us understand the process of financial goal definition through an example. As before we take X who has a 3 year old son, who is likely to go to college in 15 years time. The below steps summarizes the process:-
- X has no clue what his child will want to study or be capable of. However as he is an Engineer and that is also the default option in India, he fixes on that. If his child does something else it will probably cost less.
- X looks at the variety of colleges and courses available to get an idea of the costs. Good government colleges and top private colleges are highly competitive and only the top 5 % of the general population make it there. There are of course many other colleges and in some states the number of seats exceed those of the potential students !! From a cost perspective government colleges can be as low as 6 lacs for 4 years and top private colleges about 20 lacs.
- X then looks at Education related inflation and sees it at about 12-15 % annually. As he wants to be conservative he wants to plan for a current cost of 20 lacs with an inflation factor of 15 %.
- So after 15 years the course will cost 1.63 crores. Before you dismiss this, just think of the past 15 years. When my children were 3 years old, cost of a 4 year BE in a top university was only 2 lacs or so. It is 20 today.
- Now that X knows the future monetary value of his goal, he will need to plan his investments in such a way that this amount becomes available when his child is ready for college in 15 years.
We will talk in much greater detail about the financial plan, but that is some time away. First we need to establish a timeline and value of all the goals that a person may have. This will help in making a holistic financial plan.
I will write about constructing a time line for goals in my next post.