In the last post we have seen how we can put a value for a goal that is in the future. Using the same method we can calculate the monetary amounts for all of our future goals. As I said before, goals will come in all shapes and sizes. For a middle class or upper middle class family in India a lot of goals revolve around family, especially children. These can include children’s education, their marriages or even giving them their first car !! However, there will be other goals such as buying a house, buying other assets, vacation outside India etc. Retirement is obviously also a major goal for most of us.
Except for retirement, where we need to accumulate a corpus that will be used to generate income for the rest of our lives, all other goals are normally a one time event. So if your goal is to buy a car in 5 years time and the amount needed at that time is 10 lacs, you will need to make an investment plan that will give you this amount after 5 years. For the time being we will treat retirement in the same manner, that is you need to collect a corpus equal so some amount when you retire. How this amount will be used to generate income, is something we will deal with later on.
Now that we have all the goals and their times, along with the amounts needed to fulfill the goals at those times, we can draw up a goal time line. This is the most important exercise in Financial planning and you need to do it in conjunction with your family members. This is, of course , an individual exercise and will differ greatly between families. However, to give an idea of how to go about it, let me share a representative timeline that I had drawn up about 20 years back. I had been working for 7 years at that time, married for about 2 years and my eldest daughter was just born.
- Buy a Maruti Zen car. ( Time 1998 Monetary value 5 lacs ) Done
- Down payment for an apartment. ( Time 2002 Monetary value 15 lacs ) Done
- Replace Zen by a Sedan class car depending on career growth. ( Time 2002 Monetary value 9 lacs ) Done
- Pay off the housing loan. ( Time 2005 Monetary value of Principal 15 lacs ) Done in 2006
- Replace the Sedan car with a D segment car. ( Time 2009 Monetary value 15 lacs ) Done
- Daughter’s admission to college and 4 year costs. ( Time 2012 Monetary value 10 lacs ) Done value 12 lacs
- Son’s admission to college and 4 year costs. ( Time 2014 Monetary value 13 lacs ) Done value 20 lacs / 5 yrs
- Take wife on a vacation to Australia / Europe for 20th anniversary. ( Time 2014 Monetary value 6 lacs ) Done
- Reach a situation of financial independence. ( Time 2015 Monetary value ….) Done
- PG admission for daughter and 2 year costs. ( Time 2016 Monetary value 12 lacs ) Underestimated
- PG admission for son and 2 year costs. ( Time 2018 Monetary value 15 lacs ) In 2019 & Underestimated
When I made this goal timeline I had no clue as to how all of these would happen but I wanted to plan along these lines, as all of these were important to our family. In retrospect, some of these amounts were not correct, in some cases the situation changed. For example my son has got admitted to a 5 year course in BITS and the costs will be closer to 20 lacs for this. However, as you will see from the status against each goal, the overall accuracy of the plan and the achievement of it is remarkable. We sometimes do not understand it, but writing down your goals and working towards them methodically is a very powerful way of achieving your goals.
Your timeline may be very different from mine, maybe you want to do completely different things in your life. Howerver, the first step in financial planning is to put down your goals in this format on paper.
Once we know how much we need and when, we can get down to actually planning our investments. I will address this in my future posts.