From our expenses Account, we know how much money we spend/need every month. We also know where we stand today in terms of wealth, from calculating our Net worth. The next step is to know where we need to go
What are your short term and long term Financial Goals?
Money is only a means to get somewhere. Instead of simply saving money for the sake of it, we need to clearly define goals against which want to save money for.
Let us consider the case of Maya. Maya is a 23 year old IT executive who is currently working in a software company.
Her Life Plans for the next few years are :
- Get a new two wheeler – 45,000 – 6 months to 1 Year
- Get a Car – 5 Lakhs 3 Years
- Get Married – 15 Lakhs – 2 Years
- Save for retirement – 1 crore – 25 years
- Save for down payment of a house – 15 Lakhs – 5 Years
She also knows how much she earns today (Rs.40000) , her savings rate (Rs.4000 – 6000) and her likely increments over the years (about 10%).
She has been working for the last 5 years and has been prudent with saving judiciously. She has a networth of 3 Lakhs spread between her PF, Savings in the bank and some gold.
Let us look at Maya’s case. The list of Goals mentioned by Maya is actually a wish list. It is apparent from the current status it would not be possible for May to achieve all that she has mentioned in her list. So it us important for Maya to priortise what she wants.
Step I : Priortise your goals
Maya looks at her goals and realises that she will not be able to get to all our goals in the time frames she has given at her current life style expenditure. She re-looks at her goal and realises that not all are equally important. Her revised goal list looked like the below:
Savings for wedding – 5 Lakhs in 2 years ( While Maya wanted to pay for all her wedding expenses she realises it is not possible and has committed to pay for 5 Lakhs while the remaining will be paid by her parents.)
Save for Retirement – 50 Lakhs ( She still hopes to acheive 1 crore jointly with her future spouse)
Save for Down payment – 15 Lakhs in 7 years
Let us look at the variable components and see what options are available for her.
Step II : Reduce Expenses by looking at priorities and alternatives
- Maya looks at her expense tracker and finds that she spends a lot on her commute to work as she takes an auto both ways. It is for this reason that she wanted to buy a two wheeler soon.
- Maya also pays for a Gym membership where we she lives which she uses at 2/3 days per week. She feels inspired by a colleague of hers and decided to buy a cycle and use it for her commute to work. This will solve her primary commute issue to work. She cancels the gym membership as her daily commute will give her the required exercise.
- Maya is staying in a 1 BHK near her work place and loves the locality. She collaborates with her other colleagues in same apartment who stay in a studio and move into a 2 BHK where everyone saves on shared rent and other expenses by atleast 1500/- per month. She feels that since her office gets new interns all the time from other states it wont be difficult to fill in any vacancy that may occur.
- Maya also gave up her cable connection and got Amazon prime. She also upgraded her internet from broadband to a fiber optic cable of higher power that costed almost the same.
- Instead of going to the mall every weekend and buying new clothes that she does not necessarily need, she joined a cycling club and went cycling with them every alternative week. She made great friends and explored new places.
Although this life style changes took more than 3 months to implement, Maya managed to save an additional Rs. 7000/- every month.
Step 3: Improve Revenue
The other option to improve revenue is something most employees think that it is not applicable to them. But Maya has an entrepreneurial mindset and wanted to utilize her free time to enhance her skill sets as well as revenue.
She reached out to a computer institute near her home and offered to take classes on python, an up and coming computer language which she works on in at her office for 2 hours every Sunday. This will bring her another additional revenue of Rs.8000/- per month.
While Maya had to make so many lifestyle adjustments which took almost 6 months to accomplish, she was able to get to this additional revenue with just a couple of phone calls and follow up from her contacts. Improving your revenue might be a simpler and more expansive way to attain your goals without cutting back on much. So do consider this option well before dismissing it.
Step 4: Automate Your Savings
Now that Maya has cut down on expenses and increased revenue, this has resulted in an additional savings of Rs.15,000/- p.m. She knows that to keep too much idle cash in her salary/savings account may lead tempt may temporarily distract her and lead to excessive spending or unnecessary lending.
So she sets up her funds to retirement through Voluntary PF with her employer, her funds for marriage in a flexible Recurring Deposit like iwish and her home down payment through Post Office RD for 5 years.
Maya understands that despite her best plans the amount may fluctuate month on month due to contingencies. So she has built in for fluctuations while enforcing a discipline in her savings.
Four steps to achieving your Financial Goals
- Priortise Your Goals
- Reduce unwanted expenses/cash outflow
- Increase your revenue/cash inflow
- Automate your Savings
These four basic steps should help anyone get closer to their goals. Investment and Insurance are vast subjects that we can handle separately in future posts. Please do let me know if you have any questions/suggestions.
Maya now feels confident about achieving her important financial goals. Be like Maya 🙂