Financial planning is important at any age irrespective of your financial status. It is the lack of a disciplined approach and sound strategy that drowns many a well-intentioned plan of retiring to a luxurious lifestyle. We all dream of sound financial health but nearly 84% of the general population leaves the dream to come true on its own. A study that involved about 1600 people from different age groups shows that there was no clear financial goal while planning for the future.
Some dreams do come true and you reach a goal of having an annual income of 50 lakhs. The lifestyle that comes with it is luxurious to say the least. You can look forward to owning a large home in a posh locality, furnishing it well, riding the car of your dreams, and wearing the best brands that markets can offer.
If you have children, they are entitled to go to the finest schools and colleges. Foreign holidays and cruises are a part of your vacation plans; you can even plan multiple vacations in the year! You have the latest gadgets and the best phone in the market. You can party at the venue of your choice. In short, you have everything that a person could ask for!
But, reaching this goal requires smart financial planning. Making money is much easier than maintaining and growing a corpus, but with the multiple ways of planning and strategizing, you can reach this income goal. The younger you start the better it is as the multiplier effect of investing comes into play. But, if you haven’t, do not lose hope! There is a plan for every age and every stage of life.
Financial planning is the strategy you put in place to manage your income, regulate your debt, create life goals, and allocate investments. This planning is done according to your income and needs in mind, which are unique to every individual. Your income and needs change at various stages of your life, and these new changes require you to review your own goals and aspirations.
Financial goals and objectives are different in your 20’s, where income is small and responsibilities are low. Career planning is more important at this stage than financial planning. At this stage, you need a plan that is incumbent to follow your growth trajectory. The thirties bring with them their own struggles where your family is young and the responsibilities begin to pile up, and your plan needs to be in synergy with them. As you and your family mature, you reach a more stable plan with a less tolerant risk profile. This plan sets in motion a sequence of actions that will culminate in reaching targets and goals you set for yourself. Due diligence is of utmost importance here before you attempt to plan your financial roadmap.
The process of planning involves the same basic components. The first one is to accurately assess income, expenses, and liabilities. A well-analyzed financial plan creates a safety net for your future and helps you take the decisions correctly with clarity on life and financial goals. It teaches you the importance of a disciplined approach to making a budget and sticking to it. Do keep aside a part of your income to enjoy your youthful pleasures while keeping a prudent eye at the future.
If you want to accumulate a corpus of Rs 50 lakh by the age of 40, first create a plan that gives you ample scope to create this wealth smartly. If needed, take help from a professional.
Do a goal-setting exercise by categorizing them as short-, medium-, and long-term ones. Short-term goals include planning to get married, taking a vacation, or even save for a down payment on a car. Medium-term goals may include a 5-7 year period where you may want to buy property or take a foreign holiday, and long-term goals may be your retirement, a child’s higher education, or marriage. The goals must be objective and include scenarios that encompass both risk profile and appetite.
Once this is in place, determine the best suited Financial Plan to achieve these goals through proper investment and suitable tax planning.
The 20’s are a heady time. The young neo adult is in the process of embarking on a career and may be strapped for cash. But, ignoring to plan your finances can be a bad move. This phase will give you a good chance to amass knowledge and experience about investing. Financial planning will require you to make decisions about how to make the best use of the available resources.
It is very essential to inculcate and maintain a disciplined approach to savings to create a tax-friendly corpus in the long term.
If you began planning and investing according to your financial plans in your 20’s, this should be easy. But, if you haven’t, it’s not too late to start now. Money compounds with time when invested wisely. So, time is the most crucial factor when planning for your 50 lakh income per year. The basic steps of assessing, budgeting and goal setting remain the same irrespective of the age when you begin your financial planning.
Once you have secured your family with adequate Life Insurance and Medical Insurance and kept aside a buffer for addressing emergencies, you can start creating your plan in accordance with your goals.
Short-term goals are ideally met through conventional instruments like Fixed Deposits and recurring deposits that can give you returns of about 8%. Once you have a hold on your short-term goals, you must start planning for your medium- and long term goals.
Invest in diverse equity instruments like stocks, SIP’s, and ULIP’s (Unit Linked Insurance Plans) to maximize returns and beat inflation. Your risk profile is medium at this age as responsibilities tend to be high with children and dependent parents.
For example, if you are drawing a salary of Rs. 15,00,000 per annum by this age, you should save 30% or Rs 5,00,000 every year to create a substantial corpus in 30 years.
PPF/EPF = 1,50,000158% CAGR = RS 43.98 LAKHS. This can be reinvested in an FD on maturity. This corpus can grow to create a wealth of about Rs 1,40,54,416 for retirement at the age of 60 (taking interest rate at 8%).
SIP/Equity = Rs 3,50,00030 years15%CAGR = Rs 20.3 crore approximately at the age of 60. This should be enough to fulfill your long/medium term goals of funding children’s higher education and marriage. You will still have a surplus to invest in a monthly income scheme to allow you to lead a life of luxury at retirement.
As Mutual Funds are highly liquid and attract only Long Term Capital Gains Tax after a year of holding them, they are a good form of investment for medium- and long-term goals. Be careful to choose a well-balanced portfolio. A portfolio consisting of 50% small- and mid-cap funds and 50% large-cap funds should suit your risk profile. But, that eventually is the prerogative of each individual.
If you are one of those unfortunate ones who has not been able to create and execute a financial plan by this age due to extreme circumstances, there is still hope if you plan and invest wisely. Assuming you have already bought a house and are debt free with a salary of about Rs 25,00,000 per annum you should be able to save about 25% of your salary after all expenses. If not, it is imperative that you clear all debts at the highest priority, with the high-interest debts like credit card loans on top of the list. Financial planning can be achieved only when pressing loans are cleared.
Financial planning can be complicated in your 40’s. This is the age when most pressing concerns like your child’s higher education, EMI burdens and creeping health concerns are rampant. It is also a period where you are risk-averse. The first step is to budget for your own retirement. It is the best gift you can give your children. Do keep in mind that they will be able to take education loans but there are no ‘retirement loans’.
Fixed Deposits and Structured Fixed Maturity Plans can go a long way in creating financial stability. Look at investing about 30% of your savings in this instrument.
And so on. You can end up with a sizable corpus by retirement. This could be invested in a monthly income scheme or Pension to earn you a comfortable lifestyle.
Financial Planning is a dynamic process and should be reviewed at regular intervals to ascertain that you are on the right path. These are indicative plans and no one shoe fits all. Every individual has a different need and different life goals. It is always a smart option to seek professional help. After all, it is all your hard earned money and your future that you are planning for!
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