What if I told you,that your financial freedom is just Rs. 15,000 p.m. away? Start at 25, and by 45, you can retire with a corpus of Rs. 1 crore and a house worth Rs. 50 lakh!
Every Indian is familiar with the concept of "compromise". We have multiple plans, but we almost never have the resources to execute them all. This is when plans get divided into wants and needs, with some plans never seeing the light of day ever again.
Among the above two goals, early retirement might be categorized as a "want". A house, however, is a "need", no matter how you look at the matter, whether it's for a family, or to experience the freedom of owning a house.
Trying to achieve either of these goals comes with the added hiccup of compromise again. People often think that financial planning is all that is necessary. That isn't the case, however, as planning is only half the job done. Execution of these financial plans is still difficult for a majority of the populace. This difficulty arises because people lack the financial freedom needed to pull the trigger on these plans. People have obligations and limited finances to fulfil these obligations. As a result, financial planning and its objectives become a dream of a distant, unattained future.
But what if there was a checklist, one that could help you either achieve the financial freedom you need or set you in the right direction. Confused? Unsure? Don't be, just read on.
Identify your Expenditure
When it comes to saving, most people will follow various ratios blindly on how much they should save, spend and invest. These ratios aren't wrong or the problem. The point these ratios try to get across is discipline. Follow through with any of these ratios for long enough and a person could and would reach their desired goal.
The part where people go wrong is the order in which their finances should be allocated. Most people save before they spend and significantly reduce their likelihood of sticking to their savings plan.
Think of your finances as a diet. You can only stick to it if the benefits the diet brings you are not offset by too many inconveniences. When a diet gets too restrictive, you're more likely to "cheat". Similarly, if you save first and limit your month's spending to what's left after saving, you will have to compromise on not only what you want, but if your saving policy is stringent enough, it might affect your available funds for what you need as well.
So it's important to remember that Income-Expenditure=Savings, and not Income-Savings=Expenditures. Now, your expenditures are divided into what you spend on wants and what you spend on needs. The latter takes an obvious priority, but everyone knows that we could do with fewer expenses on some things that are "not so necessary".
"Do you really need those three OTT subscriptions?"
"Isn't that the third time ordering out to eat?"
Wondering if your spending habits, and by extension, your saving habits are unsustainable? Worry not, Recipe's "Spending Habit" Prosperity Ingredient can help you analyse your expenses, and not only tell you the state of your finances but also suggest necessary changes needed to meet your various goals.
Now that you have your spending in order and some savings in hand, what do you do with those savings? Well, invest of course! But where? Let's find out.
Investment Goals
"A penny saved is a penny earned" everyone has come across this phrase at some point in time. Well, the phrase seems to have been penned before the concept of inflation gained popularity because just saving money does not help a person's finances in this economy. If anything money kept in a locker loses its value over time. This is why people need to invest to ensure that their savings grow and their value keeps up as time passes.
So the next obvious question is, "Invest? But where?" Well, that depends on your risk appetite. A person's risk appetite is affected by multiple factors; their age, the presence or absence of dependents, and investment goals are some of the major aspects that affect a person's risk appetite and by extension, their investment style.
For example, a person in their early to mid-20s with no dependents planning to buy a car by their 40th birthday is a fairly flexible investment goal. The fact that this investment doesn't fund a need makes either makes it viable for this plan to take more risks.
On the flip side, a person in their 40s planning to save for retirement has a rigid schedule and the investment would be funding a rather sensitive need. Due to these reasons, the investment goal becomes risk-averse.
To help you understand and map your investment journey better, Recipe has the "Financial Appetite" tool that helps you understand your appetite for risk in terms of investment instruments.
But what if you are not big on the DIY Investment scene and need some hand-holding to kick-start your investment journey or you are on your journey and would like some guidance? Well, Recipe's Stock Recommendations section has you covered for that as well. Our experts have hand-picked selections of Stocks, Mutual Funds, ELSS, Insurance and many more instruments to suit your needs. So head on over to Recipe and get planning!
Crunching Numbers
Now don't think for a moment that I forgot about the Rs. 50 lakh house or Rs. 1 crore corpus. Let's get a little sneak peek at how that could work.
So, for our example, we take a 25-year-old with a monthly income of Rs. 40,000. Their expenses on essentials are Rs. 15,000 and non-essential expenses are Rs. 8,000. Assuming they pay an insurance premium of Rs. 2,000 per month, their monthly savings would amount to Rs. 15,000. Notice how the leftover money is the savings and not the other way around.
Now, let's give this 25 year old no dependents and assume that they have an existing Mutual Fund of Rs. 80,000 and a PF worth Rs. 1 lakh. This means they already have a head start to their goals of funds for a house and retirement corpus. The lack of dependants would give them a high risk appetite. Now the savings worth Rs. 15,000 per month would go to appropriate investment instruments and their investment goals would look something like this:
To achieve the aforementioned goals, Recipe says you need monthly savings of Rs. 17,000. The subject of our example could earn an additional Rs. 2,000 as a bonus, could reduce some expenses on wants, or even adjust the goal by a few years and achieve the planned outcome.
Finishing Up
Now, while the plan mentioned above is quite tailor-made for a very specific situation, none of the scenarios mentioned above is too out of the world. And the entire point of the above example is to show how realistically possible a financial goal can be if a regimen is stuck to. One that isn't too restrictive but effective still.
The numbers can and will definitely change from person to person, but a general idea of a direction and sticking to one's plan are better options than sitting along waiting for the perfect opportunity.
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