some questions like…
“Which is the best investment?”
“Please suggest some good investments.”
“Should I invest in stocks or real estate?”
“Which mutual fund schemes should one buy this year?”
“Which is the best mutual fund scheme?”
“What is your view of the stock market?”
“Are my investments proper? Or should I make some changes?”
Why Investments?
Investing is an effective way to put your money to work and potentially build wealth. Smart investing may allow your money to outpace inflation and increase in value. The greater growth potential of investing is primarily due to the power of compounding and the risk-return tradeoff.
Financial Goals
A financial goal is any plan you have for your money. You can have short-term financial goals (like saving up $3,000) or long-term financial goals (like investing for retirement). You should set goals for every area of your life, but having specific financial goals helps you literally put your money where your goal is.
Among the most common are funding a child’s education, cost of the marriage of one’s son or daughter, funding the lifestyle in retirement, buying a vehicle, buying or renovating one’s house, taking a big vacation. At the same time, there could be some not-so-common ones like starting one’s own business, or taking a sabbatical from work and funding one’s higher education.
Goal setting is a very important exercise, while planning for investments. all the financial goals are about the need of money that cannot be fulfilled through the inflow at that time. While the expenses for the goal may be high or low, the income (from salary, professional fees, etc.) may be less than the amount required to fund the goal. This is where money needs to be withdrawn from the investments – in other words, this is why one needs to invest the money.
The first step in goal setting is to identify these events in life. Some of these are desirable and can be planned, whereas some others, which may be undesirable, may spring up as surprises. Those events with potential negative outcomes would be undesirable. Some of the examples of the same are death of a family member, hospitalization, accident, theft, fire, etc. One cannot plan to fund the expenses associated with such events through investments, though we can create an emergency fund using some savings and investment products. Apart from the emergency fund, one may buy insurance policies to cover the risks of such events.
After identifying the events, one needs to assign priorities–which of these are more important than the others. Retirement, or children’s education fall into the responsibilities category, whereas a grand vacation may be a good-to-have goal. Having said that, it is only the individual and the family that can decide which is which. A financial advisor or a mutual fund distributor may only guide and help one take an appropriate decision. At the same time, the role of such an intermediary would be very important. After that, one needs to assign a timeline as well as the amount of funding required at the time of such events. For example, if someone is planning to buy a house, one needs to decide the type of house one wants, as well as the location. These inputs would help arrive at approximate cost. After that one needs to decide when one would like to buy this. Both the timeline and amount are critical for one to be able to plan to achieve the goal.
Such an exercise allows one to classify the goals in terms of the timeline – are the goals in the near term, or far in the future?
Make Short term needs & Long Term Goals
Financial targets, their achievement and time horizon for Inflation
The next step would be to assign an amount to financial goals. In the planning process, this is an important question: How much will it cost? A person wants to become a space scientist, for which he needs a good quality education. How much will such an education cost? Well, this question must be answered in terms of the amount needed when the person reaches college. And that's almost a decade from now. In such a case, the cost is likely to increase. Such an increase in the price of goals is called inflation. It applies to many other areas of personal finance. It is known as inflation with respect to target value. Inflation adjustment is important for target values, without which the entire planning can go awry. The cost of education has been increasing at a very rapid pace in the last few decades. The same is the case with healthcare costs, which can have a big impact on spending during the retirement years.
Inflation has a long-term impact, and hence while planning for funding all the long-term goals, one must consider inflation in the cost of the goal. On the other hand, the immediate term and near-term goals may not have a big impact due to changes in price.
As mentioned earlier, inflation is the rise in prices of various products, and services consumed. If the inflation is 6 percent p.a., the household expenses would be higher a year later in comparison to today’s cost of living. If a family’s monthly expenses are Rs. 50,000 currently, they would be spending Rs. 53,000 next year if the inflation is 6 percent. This does not look like much, but if the inflation stays at the same level, this family’s monthly expenses would be roughly Rs. 89,542 after 10 years; and Rs. 1,60,357 after 20 years.
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