One of the first steps in the financial planning process is setting goals. Every person has some requirements that do not fit in their incomes. Though Singh has listed out his requirements, his income is too small to accommodate all of these. Hence, he needs to evaluate and prioritise his goals.
If, in today’s rupee terms, his higher education costs Rs.25 lakh, car costs Rs.10 lakh, house Rs.1 crore and wedding Rs.25 lakh, he is looking at a spend of Rs.1.6 crore. With an annual salary of Rs.7.8 lakh, this is almost 20 times his income. If, after allowing for expenses, he manages to save Rs.3 lakh a year, at current estimates, his goals are almost 50 times his saving capability. Inflation will also increase the value of goals. So, he needs to save and invest in assets that beat inflation if he plans to fund his goals with savings. However, even this may not be sufficient considering his current income level.
Singh will be able to meet his goals only through a combination of three options: higher income, higher savings, and borrowings. If his income increases, say, after the post graduate degree, he can take an education loan to fund his studies. He can then use the higher income to save more, and also borrow a portion of what he needs for the house and car. For example, if Singh’s income increases after two years, when he completes his education, he will have more surplus to repay the education loan. In that time, he would also have saved some money for his wedding. If he postpones buying the car till after he has repaid the education loan, it will leave him with some savings. The house can be bought after the car loan has been paid off and after his income has increased further.
Along the way, Singh may also notice that some goals are more ambitious than others. He will find it useful to set ‘stretch’ goals, the ones he’ll have to stretch to reach. He may achieve some in the specified time frame, but for others, he may have to extend the timeline. Instead of taking on all the goals at the same time and funding them with savings, he can prioritise so that he can borrow to fund some goals, while increasing his income and savings. Without this balance, he may have to sacrifice a few goals or postpone them.
Content courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.