Good financial planning can actually mean the difference between living a good life and staying broke on the same income.
In 2001, a father of young twin brothers, Ajay and Rahul, decided to gift his sons Rs 1,00,000/- each on their 21st birthday. Ajay and Rahul looked alike almost in every way. They both studied in the same engineering school, and both went to work in the same IT company in Mumbai and got married.
However, there was this difference. By the time the twin brothers turned 40, Rahul’s worth of Rs 1,00,000/- had skyrocketed to approx. Rs1,45,19,274/-. And Ajay’s gifted money has lost its value to a measly Rs 4262/-.
How is that really possible?
Have you ever wondered what could make such a difference?
It’s not that one wants to accumulate wealth and get rich, and the other doesn’t. The difference is in one thing.
Good financial planning
Let me explain.
Ajay used his Rs 1,00,000 to buy two Royal-Enfield bikes (an Eicher Motors product) around Rs 55,000/- each at that time.
Rahul invested Rs 1,00,000 in buying 5714 shares of Eicher Motors for Rs 17.50 per share.
Ajay and Rahul bought their assets from the same company. The value of the bike decreased by 95%, while the value of the stock appreciated by 14419%.
I know it’s a lifetime, extraordinary example, but here’s the point.
The exact amount of money used differently transformed their lives and their family lives on forever. And that’s just a decision. Rahul knew the power of good financial planning. So he naturally made several good financial decisions over the past 20 years.
He controlled the outflows of his money and stretched every penny saved to its maximum potential. As a result, he could spend on things he loves without guilt. Travel with his wife and children to various exotic locations in Europe and send his children to one of the best colleges in America, and his retirement is assured. But Ajay and his wife have so many grand-grands and sometimes even big fights because of the financial crisis and the difficult situation. And he is always worried about the big expenses that suddenly arise in the future. It’s not a good situation, is it? And that is why I am writing to you today.
The right financial planning can actually mean the difference between living a good life and staying broke on the same income.
Let me give you another example.
Today with Rs 100, you can buy 10 chocolate bars. Let’s say that in a year, chocolate prices jump to Rs 12. Now, you can only buy 8 chocolates. This means that the purchasing power of your Rs 100 is lost by Rs 20.
This is inflation (which was around 6% in India in 2021).
This means inflation is eating up your hard-earned money right now if you don’t invest it properly.
Your money is exposed to three major threats
One is inflation, as I just said. The second is to be lured into buying things you don’t need. And most of the time, it’s not your fault. Look, corporations spend billions of rupees to hijack your brain and seduce you to give away your money. And if you haven’t planned your finances carefully, you become its victim. You end up buying the latest gadget, new limited-edition sneakers, and throwing extravagant parties with your friends, and a lot of your money is wasted.
Financial planning isn’t just for the future – it’s for your today, tomorrow and your retirement.
Did I mean that you can’t spend money on personal luxury and comfort at all? No, I don’t mean that at all. In fact, if you plan a little, you can enjoy the things the world has to offer and that too without guilt like Rahul from our first example.
Now let’s look at the third biggest threat. Most people without the right financial planning could never enjoy life. The rich multiplying power of compound profit means profit on profit. It’s like money producing baby money. But the first step is to start investing money in the right place, at the right time, and for the right duration. The earlier you start the better.
62% of millionaires rely on a financial planner to help them manage their wealth
A professional planner can take a close look at your life goals, expenses, future plans, lifestyle, retirement plans, and risk appetite to create a personalized wealth building plan for you.
Here are some simple things to start your financial planning
Draw a comprehensive roadmap of all your life’s financial goals. For example, buying a car, buying your first or second home, travel plans, your child’s college education, your son’s or daughter’s marriage, investing in your dream, retirement savings, saving for a medical emergency, creating a charitable foundation, etc. List them in the short term, medium term and long term.
Now list the details of your income, cash flow, monthly expenses (housing, utilities and other recurring expenses), savings, debts, investments, insurance and any other financial instruments you may have.
You need a clear and accurate picture of your financial situation. No guesswork, no false assumptions. The next step is to start allocating the funds into different compartments, for example: monthly expenses and bills, emergency funds, personal and family needs (clothing, restaurants, entertainment), savings, investment and retirement. Make sure you protect your financial stability and your family’s security with the right insurance. And as your income increases over time, plan to have at least 6 months of your living expenses as an emergency fund and increase your contribution to your retirement plan. Do your best to get rid of credit card debt and other high interest loans, if any. Switch to the minimum interest rate for your long-term loans such as a home loan.
Now, the only way to stretch every rupee you earn to its maximum potential is to have the right investment strategy. So carefully evaluate various investment options such as SIPs, stocks, mutual funds, gold or gold sovereign bonds, real estate and private equity, etc. You want to invest with the potential to earn compound returns. And in today’s market, don’t settle for 5% or 10% return when you can get an 18% or 25% or even more increase in earnings return year over year. You see, it’s a matter of income, current lifestyle, financial security for your wife and children, a secure retirement, and your financial independence in the future.
Choosing the right financial planning consultant is extremely important.
You don’t want someone who just sells you financial products to get big commissions from their partners. You want a financial advisor who can help you with objective, unbiased and experience-based advice. Whether you’re 25, 35 or 55, you can start planning your finances today. An experienced financial planner will create a personalized plan that’s right for you. You will feel a sense of satisfaction and confidence that you have never felt before. Because now you’ll have a solid financial plan to weather market downturns, take advantage of wealth-multiplier investments, and have emergency medical and nursing funds for the future. So start today. You don’t want to regret it later like Ajay.
(By Videsh K Totaare, MD and CEO, Archers Wealth Management Pvt Ltd)
Financial Express is now on Telegram. Click here to join our channel and stay up to date with the latest Biz news and updates.