Q. I am Riya, recently married and living in Delhi. I work as a Quality Analyst in an MNC and my husband, Arjun, is a professional photographer. We have purchased a small apartment on a home loan and are planning to start a family in a couple of years. Our goals are to repay the home loan, save for our child's education, build a fund for emergencies, and plan for retirement. What steps should we take?
Congratulations Riya, for thinking of these goals at the right time. Here are some steps we suggest so that you and Arjun can confidently get going on your journey towards financial wellness even as you address your goals.
Assess your current financial situation
Take a close look at your current financial situation. Include all details—combined income, expenses, and debts. The idea is to get a clear picture of where you stand today.
Prepare a budget
Simply put, a budget is a statement of how much you plan to (and need to) spend and on what, based on how much you have to spend. It is important to make it realistic so that you can achieve it. Track and categorise each expense as critical or discretionary. This will help you spot which expense demands the most money and where you can maximise your savings. Do remember to make provision for an emergency fund that will help you tide over any unexpected financial emergency. This fund should be large enough to take care of monthly recurring expenses for 3 to 6 months.
Define goals
You are already clear about your major goals. Now you need to think of the other goals you might have in mind and ensure every goal is SMART—specific, measurable, achievable, relevant, and time-bound. A well-defined goal is like a clear target. Something that you can hit with the help of a structured and disciplined financial plan. Divide the goals into short-term and long-term so that you are able to make the right investments. For example, you would want to repay your home loan well before you retire, right?
Calculate the corpus you need
Now that you know your goals and have a budget, think of how much money you will need, or, in other words, the corpus you need to build. Remember, today’s cost of attaining a specific goal is likely to increase over time because of the effect of inflation. So, what matters to you for budgeting and for planning your investments is the future value. Ideally, your estimate of the required corpus should be close to or even a little more than the future value of your goals.
Plan your investments
A good investment plan strikes the optimum balance between how much you can invest and how much you need to meet your goal. Every investment comes with its own risk-reward profile—the riskier the investment, the more rewarding it can be. However, you must be aware of your risk tolerance—how much risk you can and are willing to take while making an investment.
Risk management
You and Arjun are likely to want your family to be able to maintain the current standard of living should something happen to either of you. Life insurance is the answer to cover this risk. In order to calculate how much cover you need, consider your current total expenses, and the goals that must be protected (like repaying the loan and providing for the child’s higher education). Deduct the value of your current assets plus the value of any insurance cover you might have already. That will give you a fair idea of the insurance cover you need.
Monitor and review
Once you have a financial plan in place, both of you must monitor its progress. There are bound to be changes, in your lives as well as in the investment domain. You must be aware of the impact of every change on your needs and your expected returns. Depending on what your review reveals, be ready to make changes in your plan.
Seek help from experts
Designing a personal financial plan to suit your needs and keeping a close eye on those are tasks that can demand both expertise and time. Your best bet is to engage a certified financial advisor who has the knowledge and the experience to understand you best. They will be able to guide you through the design of the plan, explain the various options available to you, help you with the execution of the plan and, very importantly, keep a tab on changing circumstances so that your financial journey is always on track.
International Money Matters Pvt Ltd is a 20-year-old SEBI registered financial planning-cum-investment advisory boutique. Please click here to find out more.
