Hello again!
Did you have a good week? More importantly, did you take some time out to write down your goals? I know some of you did because you emailed to tell us about them! Anand told us about his long-term goal of setting up a school and Tanvi even sent us a picture she drew of the house she wants to live in. Such lovely stuff.
We love receiving such emails so keep ‘em coming at money@finshots.in!
But it’s also okay if you were caught up last week and didn’t get the time to do it. Maybe we can do it now? Because having it all written down is going to help you when we crunch some numbers today and draw up a basic financial plan. We’re going to find out a little about taking risks and how much we need to invest towards our goals. And that means, there’s another special spreadsheet we’re giving you too! :)
Before we jump in, here's a quick look at what we've covered so far: Week 1 (habits), Week 2 (budget), Week 3 (income), Week 4 (taxes), Week 5 (insurance), Week 6 (goal setting).
How long will the exercise take? 🕰️
45 minutes. That’s it.
Do it before your next meal? Because we all know what happens after a heavy weekend meal. ;)
Ready? Let’s begin Resolution #7!
Let me give you a fair warning. If you get overwhelmed by large numbers, ask your best friend, partner, or family member to join you in on the exercise. It’ll be nice to have someone your trust join in this journey too.
Alright then. Have you got that spreadsheet or piece of paper where you’ve written all your goals? Brilliant.
Step 1: Understanding risk
There are lots of different kinds of risks and we could have an entire Resolution for understanding risk. But for the purposes of a financial plan, the biggest risk is that we don’t meet our goals!
And that can happen in two ways.
Firstly, we set unrealistic expectations. For instance, we set a goal of buying a car that’s worth ₹15 lakhs. We want to buy it in 5 years. So we do a quick calculation to figure out how much we need to invest every month to amass that sum of money. And we find that it’s ₹11,000 monthly. So you begin saving up. And 5 years later, we find that we only have ₹8.50 lakhs. Why did that happen? Because we assumed that we’d make an unreasonably high return of 20% per year. If we’d assumed a more reasonable return of 10%, we would’ve realised we actually need to invest ₹19,000 a month. So remember, the stocks or cryptos are not going to provide a high return just because we need it to. They have a mind of their own. So our expectations have to be realistic.
The other kind of risk is that we don’t take any risk at all. Let me explain. We put all our money in savings bank accounts or fixed deposits. And we don’t realise that inflation is screwing us over. The house we want to buy might cost ₹50 lakhs today. But it could cost nearly ₹1 crore in just 10 years from now. If we don’t take a bit of risk, our money won’t grow. And we won’t have enough money to achieve our goals.
As you can see, taking the right amount of risk is crucial for our financial plan.
Step 2: How much money do you need to invest?
This is the tricky part. But fret not, this is where our spreadsheet will swing into action like your friendly neighbourhood Spiderman!
The only thing you have to do is list out your goals. Then write down how much money you’re going to need for it and choose the kind of risk you’re comfortable with. We’ll take inflation into account and everything.
Okay, setting values for most goals is easy. For instance, you just need to figure out how much your dream home costs today. And then we’ll sort of inflate that value into the future. For when you actually want to buy it.
But how on earth do you calculate what’s needed for retirement? Well, we’re ditching the complex calculations in the spreadsheet and we’ve used a simple thumb rule to help you understand this. Oh, and don’t freak out. Retirement numbers can look daunting.
Just trust the spreadsheet
Step 3: What investments work for your goals?
You’ve already listed out your financial goals and the year in which you want to achieve them, right?
Now club them together.
- Goals that you want to achieve within 5 years
- Goals within 5-10 years
- Goals beyond 10 years
Done?
For the goals that you want to hit within 5 years, you may not want to take on any risk at all. Stick to safety. It could be invested in things like debt mutual funds (we’ll explain a little more about these next week). Because protecting your money is the number one priority. Not to maximise returns.
If your goals are within 5-10 years, you could take a bit of risk. Some part of your investments could go into equity mutual funds that buy stocks. This way, you’re giving your money a chance to grow. And since you have a bit more time on your hands, the ups and downs in the stock market won’t hurt you too much. The other part of the money could go towards debt mutual funds. That way, you get some stability too.
For goals beyond 10 years, we can afford to take a bit more risk. More equity based investments perhaps. Give your money the best chance to grow.
Also, remember when you set goals that are for your family’s future, you need to protect those goals too. How? Life insurance, of course. If you need help in figuring out what’s an appropriate cover, you can reach out to my colleagues at Ditto Insurance! And I can promise that no one will spam you.
Step 5: Review your financial goals every year
5 years ago, you might have been happy with a hatchback. But times have changed and you now want an SUV with all the bells and whistles. That’s okay. As long you’re aware of why the goal has changed and whether it’s a realistic goal for you to achieve. So make sure you’re reviewing your goal sheet at least once a year.
And the closer you get to your goal, the less risky should be the investment tied to the goal. Let’s take buying a home in 10 years for instance. Say you’ve been investing 100% of your monies meant for this goal in equity mutual funds. And you’ve been doing this for 6-7 years. The goal is just another 3 years away now. So you can’t have all the money tied into riskier investments. You need to start protecting the money you’ve built. So, as you get close to the goal, you need to move it into more stable investments like a debt mutual fund or a bank deposit. Protect it.
In case you missed the link to the Finshots Money Goal-based spreadsheet, here it is.
A secret for you 🤐
If you’ve got started on the Finshots Money Resolutions, don’t stop now! If you do, you could fall prey to the Zeigarnik Effect.
What’s that?
Well, it’s the tendency of our brains to dwell on unfinished tasks. And if you leave in the middle of a financial plan, it could create stress. That stress could push you into restarting the plan again. But since it requires far more effort than bingeing on a TV show, you put it off again. And the stress builds up and paralyses you into inactivity. It’s a vicious cycle.
The soundtrack to end it🎵
Life Is A Highway by Rascal Flatts
And goals are all the pit stops in between!
Coming up next week 📅
We’re talking all things investing - stocks, bonds, gold, crypto…
Did you find this exercise of calculating your goal values boring? Or did we manage to make it a little more enjoyable? Write to us at money@finshots.in and let us know!
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