Sample Financial plan #5 – strategies for meeting goals

When I was helping Ravi and Madhuri in making their holistic financial plan, the process was quite smooth till we got to the timeline for financial goals. At this point both of them became rather anxious by seeing the numbers. Ravi’s first reaction was, ” I think I need to keep working till I am 65″, and Madhuri thought she should be looking for a full time job. Such reactions are normal when you look at figures like 6 or 8 crores and you can probably save only 5-6 lacs per year today.

If you have done the exercise properly till now and are feeling the same, do not worry too much. The situation in reality is much better due to the following reasons :-

  1. You already have some assets which should be known to you if you have determined your net worth correctly. These have been growing for some time and will continue to grow in the future.
  2. Some of the physical assets can be sold when you are trying to fulfill your goals. For example, Ravi will sell his present car when he is buying a new one in 2018. This will not fund the entire cost of 11.91 lacs, but will reduce the goal amount to some degree. Similarly, when they relocate to Kerala the entire 6 crores odd will not be needed from their current and future investments. A reasonable part of it will be funded through sale of the current apartment in Hyderabad.
  3. When you have time on your side, your investments are likely to grow manifold as long as you plan them properly. We saw how an education cost for MBA which is 20 lacs today gallops to 92 lacs in 18 years time. Similarly, your current and future investments will also grow. Something which looks small in today’s figure will assume significance after 15 years.

Now that we have the goal time line and the amounts needed in different years, we can go ahead and make an investment plan. The way to do it is to see that your total investments are growing at a level to ensure that your farthest goals are met by the time you reach these. In simple terms Ravi and Madhuri’s total assets should be at least 6.81 crores when they reach the year 2035. Additionally they would have spent for the earlier goals in bygone years and also have funds that will reach 97 lacs in 2040 for their children’s marriage.

Before we get into the actual investment plan, there are a few other things we need to understand. Firstly, we need to get a handle on the different asset classes and how they work. Secondly, we need to understand the risk profile of the investor for who the plan is being made. Thirdly we need to check how the extended money equation applies to Ravi and Madhuri for now and the future. This will give us a clue as to how much surplus is there for investment.

I will be writing the next few posts on these 3 topics, before getting back to the investment plan details.

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