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Follow these simple steps if you want to create a solid retirement corpus and retire young, says Anamika Pareek
Drawing up a financial plan requires a deep understanding of your own profile. There is no one size fits all where financial planning is concerned.
The following steps will ensure that your financial plan is aligned to your requirements and is successful in providing you financial freedom.
1. Goals
The first step to any action is the 'why' for the action. Simply put, this means that before taking any action, you must ask yourself why you are doing it. Similarly, before preparing a financial plan it is important for you to gauge why you need the plan. What is it you are trying to achieve?
Your requirement may be completely different from your friend’s requirement. So, as a first step, identify your goals that align to your state of financial freedom.
After goal identification, assign a monetary value to each of your goals which will tell you how much cash flow will be the ideal one for you.
2. Risk assessment
The next step is to assess how much risk you can take for your investments. This stage is not for determining how much your disposable income is. Rather, at this stage you need to assess how much risk you can take with your investments, with an eye on your dependents and your financial commitments towards them.
If you have a family including your dependent spouse, children and aging parents, it is obvious that you cannot take as much risk as someone who has a spouse who is working and is shouldering the financial responsibilities in the family.
Assessing your risk appetite in this way will give an indication of what kind of investment instruments you can invest in. For example, equity investments are considered riskier than debt instruments.
3. Investment window
Just like the assessment of how much risk you can take is important, you need to also figure out how much time it takes to become completely financially independent. This time may coincide with your retirement or an earlier date.
You may plan your financial independence to travel the world or just be stress free from worries of a volatile career path. Determining how much time you have left to achieve the value of your goals will ensure that you will know how much you should invest to get tentatively close to your target cash flow from the assets.
4. Budget
In order to save, you need to draw up a budget where you can segregate your expenses as 'needs', 'wants' and 'desires'. Your wants and desires like a new car, dine out or a vacation can be postponed or even foregone, while your needs like rent, grocery, maintenance, medical insurance cannot be.
An understanding of these different expenses will let you decide on drawing a fine balance between the amount you need to spend and the amount you should invest by sacrificing a few of the things which fall under the category of 'wants' and 'desires'.
5. Invest, not save
Saving is not enough. Money saved in your savings account will just lie there idle. You will have to invest the money you saved as a result of your budgeting exercise. To make this money grow, you need to invest it in a mix of investment instruments aligned to your risk appetite and investment time horizon.
Certain expenses like payments to be made as taxes could be reduced by planning investments into tax-saving instruments. Remember investments in equity mutual funds cannot be avoided as historically it has given the highest return.
For example: A monthly SIP of Rs 10,000 in the last 20 years in BSE Sensex would have created a corpus of Rs 95.11 lakh against a total investment of Rs 24 lakh.
SIP in BSE Sensex gave 12.29% XIRR (internal rate of return calculated on irregular MF investments) return during the period (Source: Advisorkhoj Research as on Jan 24,2024).
6. Start early and stay invested
The final step towards achieving your financial freedom is to ensure you start investing as early on in your life as possible and remain disciplined in your investments regardless of market ups or downs.
For example: How much can a SIP of Rs 10,000 started at age 25, 30, 35 and 40 grow to when you are aged 60?
As you can see in the above chart wealth creation can be exponential if you start investing at an early age.
In the end, remember that achieving your financial freedom is your own decision and is very much possible if you plan early and invest for long tenure. Discuss the best options for investments based on your profile with your financial planner or mutual fund distributor.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this QnA or an attempt to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.