Setting money-minded goals and following through on them can have a powerful impact on your entire life. When you are in control of your money you will be more confident and better prepared to weather any financial storm that comes your way. But before identifying a goal, you should understand that each goal is driven by two key aspects - the time left for you to achieve it, and the funding it will require.
Let us take an anecdote about Ankur Shah (31) and his wife Neha (29). They plan to start a family and are married for one year. They are working professionals and bring an aggregate income of 18 lakhs
annually. Neha takes care of the rent and other expenses while Ankur manages the credit card expenses and the investments. But here the problem is that they have not set their finances in order.
Let us look at some of the major problems that they might face -
There is a possibility that Neha might stop working for a short period after the child is born. They need to factor how the rent and other expenditure will be managed at this stage
They do not have ownership of any asset. They plan to buy a house, but did not account the EMI burden on their income post the child
Most of their savings are redirected to medical insurance and rest is blocked in fixed deposits. They do not have a long-term plan in terms of wealth creation
They immediately need to work on building an emergency fund
So, how will Ankur and Neha counter these problems?
Segregate your short & long term goals
As can be seen in the case of Ankur and Neha, their financial problems stem from the lack of understanding of their goals. Every financial planning starts by segregating your goals into short term,
which can include buying a house, a car and fulfilling your insurance requirements.
While the long term goals may include retirement planning, planning for your child’s education and asset creation. If both the partners are working, as in the case of Ankur and Neha – they need to collectively identify how to move towards these goals.
Identify your time horizon
Probably the first question you should ask yourself while setting your investment goal is, ‘What is my time horizon?’
In other words, when will you need the money? Your time horizon for a financial goal will have a significant impact on the type of investments you choose. Post identifying your investment goals, you need to divide your money into brackets to fulfill those criteria.
In Ankur and Neha’s case since they are planning to start a family, they need to identify whether they should start investing in their child’s college education now or fulfill some other short-term investment agenda? These simple questions will play a defining role in charting their portfolio.
Focus on asset allocation
Asset allocation helps manage volatility by combining asset classes such as stocks, bonds and cash in a portfolio. Ideally, asset allocation manages and maintains a proper level of risk weighed against desired
returns. It is always ideal to get in touch with a financial advisor, in case you are unsure about your finances. He will help you determine which asset allocation model is best suited to your situation. When it comes to your investments, your objectives are a defining point to identify the rate at which
your money will grow. If you use these simple and smart techniques– you will certainly gear towards wealth creation in no time.
Rahul Jain, Head, Personal Wealth Advisory, Edelweiss