In life, some of us like to plan out everything and some of us believe in taking things as they come. The second type of folks often have more fun than the first.

But when it comes to investing, planning helps you reduce stress. Starting early is the most important thing to building a bigger corpus. Therefore, you need to work on a financial plan as soon as you have some money of your own.

Are you forever stressing if you will have enough money to do the things you dream of? That could be vacationing in the North-east or joining an Ivy League college or buying your parents a car. If you are serious about achieving such goals and don’t earn boat-loads of money, then you need a financial plan.

List of goals and time frames

The first step in a financial plan, is to list out your life goals which will need substantial money – amounts that you can’t spare from your monthly salary. If you have dependents, you will need to include their goals too.

If a holiday in the North-east, or a Masters at Stanford or buying a family car is really on your to-do list, you simply list out these goals with the amounts you will need to achieve them.

For goals that are more than a year away, you will need to factor in the impact of inflation on the amount you will need to spend. For instance, if an entry level sedan costs Rs 7 lakh today, and you would like to buy it in three years’ time, then at a 6% inflation rate you will need to budget for about Rs 8.3 lakh. In the case of your foreign degree, you may need to factor in Rupee-dollar depreciation in addition to inflation in fees. There are many online calculators that help you estimate the inflation-adjusted targets for your financial goals.

When listing out goals, try to think a little long term and include goals say 5 or 10 years into the future, like buying a home. It doesn’t matter if the goals change later, what is important is that you start planning for them. However young you are, do put down retirement as one of your goals, because for this you need a really early start.

Put down the time frame over which you would like to achieve each goal.

Creating portfolios

Once you have your goals and time frames, you should start with one investment or a portfolio towards each goal. For goals within the next 3 years, you can have bank recurring deposits or fixed deposits, or SIPs in money market or short-duration mutual funds. For 3-5 year goals, you can have post office schemes like NSC, fixed deposits with good NBFCs or SIPs in corporate bond mutual funds. For goals that are more than 7 years away including retirement you should be starting equity investments. Do refer to our earlier episode 4 on “How to choose your investment products” for more details.

Work out your monthly investments

Once you have a list of goals with the targeted amount, you need to figure out how much you will need to invest regularly to get to them. Here online goal calculators can really help you. Here is a typical RD calculator from HDFC Bank. With it you can figure out that if you invest Rs 5000 per month in a 7% RD for 24 months, you can get to Rs 1.29 lakh by December 2025. That can perhaps fund your North-east trip.

For goals where you use mutual funds, there are any number of online calculators that help you backwork how much your need to invest.

This calculator on the AMFI site can help you figure out that, to get to Rs 5 lakh in 7 years, investing in an equity fund at an assumed return of 11%, you need a SIP of Rs 4000 per month. Be careful to use realistic return assumptions of about 7% for RDs and FDs, 7.5% for debt funds and 10-11% for equity funds.

If you fall short…

What if the calculations show that you need to invest Rs 10000 a month to meet all your goals, but you can only save Rs 5000? Then you’ll have to re-prioritize your goals. If you think your post-grad degree is more important to you than the holiday, then you try to meet that goal through your investments. You can use any windfall such as a bonus, to go on that holiday. Over time as your pay grows and you save more, you can add on more goals and RDs or SIPs.

This is only a beginner financial plan. As your income and needs grow, your financial plan will get complicated. You also need to review your goals as your situation changes and track your returns over time to see if they are meeting your targets. If you don’t have the time to do all this, you should engage the services of a fee-based SEBI registered financial advisor or a certified financial planner who can take this chore off your hands.

( Host: Aarati Krishnan, Producer: Anjana PV, Camera: Bijoy Ghosh)

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