19 May, 2015

Achieving lifes's goals

A good many people live day to day, pay packet to pay packet, hoping that the future will take care of itself. This unplanned existence might even be comfortable, but it's self-defeating. In such a life, no goal can be achieved, no dream fulfilled. It is therefore critical to plan's one's life, specially its financial aspects. Here is a guide on how to go about it:

Setting goals The great importance of knowing what one wants in life cannot be overstated. A person may have many goals, some weighing over others in that they must be achieved anyhow-owning a home, saving for retirement and children's education. These are followed by other goals-a second home, a better school for children, a holiday abroad for the family, contributing to a healthcare facility in one's village.

Prioritisation Once set, the goals need to be prioritised. Saving for retirement, for instance, should be a highpriority goal. Yet many people, often out of emotion, give this goal short shrift and instead allocate resources to less important things-celebrating a child's birthday in style, buying a new car, or holidaying abroad. This results from proximity bias-the tendency to overestimate certain social phenomena because those around you do the same. As much as prioritising goals, it is important to know which of them are achievable with the resources at one's disposal. This is where financial planners can help, estimating how much is required to achieve a particular goal and how the required amount can be made available. If your goals are not achievable, they can be scaled down- say, a smaller home-pushed back- a vacation, for instance-or dropped altogether-say, a second car.

Asset allocation Figuring out what is required to achieve a goal is the easier part of the equation. Knowing where to invest is more difficult. What will be the right mix of asset categories such as equity, debt, gold, property for your needs? This would be decided after analysing various aspects of the need-number of years to retirement, risk-tolerance levels, tenure, return expectations, liquidity. A rule of thumb would be that growth assets-equity or property-should be 100 subtracted by one's age.

Covering all bases Risk is intrinsic to life. Still, some of our risks can be farmed out, through life or medical insurance for example. Life insurance ensures a family's goals are not compromised even when the main income earner is no longer around. Medical insurance is even more important as the cost of treatment has soared in recent times and there could be several medical exigencies in a lifetime.

Insurance for critical illness, accident, home could also be considered based on the family's specific requirements. Investment Even the best laid strategies might come to nought if they are not followed through. Implementing a plan therefore is critical to get results though, admittedly, this is the boring part of the planning process. A large number of people seek to accumulate a "reasonable amount" of money before investing any. This is a mistake, for one can make an investment of as little as Rs.100 a month. Besides, investing monthly is convenient as it coincides with the salary cycle; it also brings regularity and discipline to saving.

Thanks to compounding, even modest investments done over a period of time accumulate into a significant sum. This is why starting investments early, without waiting to accumulate a big pile of cash, is important. Also, some investments should be ring-fenced for important goals, not be used for anything else however urgent-retirement corpus, for instance, cannot be used to fund children's education, buy a car or go on a vacation.

That said, investments should be made only after preparing a blueprint first. The blueprint has to be thought out well, accommodating all important goals in one's life. If done right, it would help people fulfil their dreams without much difficulty.

Author : Suresh Sadagopan   |   Article published in IndiaToday on 19/2/2015

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