Plan to accomplish

Any kind of financial planning exercise essentially begins and ends with the user. It is a systematic process of identifying and recommending various investments avenues which will help realize his / her goals.

All of us work for money. But how many of us make money work for us? Making money work for us is perhaps one of the most important pillars of the personal financial planning process. Actually, making money work for you is not that hard task, provided sound financial and investment advice is taken. A blend of the different investment avenues can actually provide the right investment mix which can play an important role in providing a suitable financial buffer for later years. However, there can be no tailor made approach to get this benefit. The so called investment mix will differ from person to person and is actually function of a number of variables like income levels, marital status, investment outlook, levels of expenses, standard of living etc. Hence, it is very difficult to evolve a standard doctrine to effective financial and investment planning. At the most, a few standard gospels may be given.

To put the process of financial planning into the right perspective, we will have discussion on the same in later posts following with the help of a case. This case will highlight yet another dimension to the personal financial planning process.

The Case Study follows here. 

Double your income - Advice on how to double your income.

More Guiding Principles

The third principle should be consistency and time value. A critical and an assured need like a child’s education cannot be matched with high risk investments. The assumptions of the plan need to be based on a lower but more secured rate of compounding to create wealth. To leverage on the time value benefits, an individual needs to commence the process of planning for the child future preferably the moment the child is born.

So you have to focus on all critical aspects of planning your child’s future. Today the biggest investment that a parent needs to make on their children is a high quality of education. There is no escaping the fact that costs have risen sharply and the days of subsidized education is history. The best way to give your child a secured future is to invest in their education by following the basic guiding principles discussed earlier. Let us put our best foot forward.

Guiding principles for your children’s future

The first guiding principle should be that of adequate insurance. Any long-term plan needs to necessarily leverage on future resources. At the same time it needs to ensure that the process of planning your children’s future does not get endangered in the event of any exigency. This necessitates that the person whose resources are being leveraged in the plan, is adequately insured so that the plan continues smoothly even in his / her absence. It needs to be remembered that the overall resources net of liabilities should be sufficient to fund the plan. 

The second guiding principle revolves around structuring of the plan. With the rising costs of education, the requirement of funds not only arises earlier but also arises more periodically. The cash flows from the children’s plan should be structured in a way that either there are a series of regular cash flow from the investments or the plan has an inbuilt borrowing facility which can be drawn upon.

It’s all about a bright future

There has been a subtle shift as far as financial planning is considered. As early as a decade back, long-term financial planning revolved around building a house and and conducting a daughter’s marriage. Retirement was normally taken care of by pensions and provident funds while children’s education was more of a peripheral expenditure. So what has changed in the last one decade? We will have a detailed discussion on it in some future posts.

Planning your child’s future has become more critical in the light of the rising costs and higher education. According to conservative estimates, a parent would be spending anywhere in the region of Rs. 25 lakhs to Rs. 30 lakhs by the time the child completes professional graduation degree. The expenditure on a Master’s or a Doctorate degree, in your home country or abroad, could take your total cost anywhere in the region of Rs. 50 lakhs to Rs. 1 crore.

Any plan for your child’s future should be broadly based on a few key guiding principles. Let me reiterate here that consistency, security and discipline need to take precedence when you embark upon the journey of planning the children’s future.

Asset Allocation for Married & have kid ►►► Age above 60 yrs

At this stage in your life you are in the verge of retirement and your children are well settled. You just need to enjoy your retirement. Your asset should be allocated as follows : 

► You have probably fulfilled all your major responsibilities. You can go in for accumulation of property for your children by investing your money to the extent of 40%. If you think this is too much, then you can think of keeping a lesser amount in property for your children. It can be 30% or 25% then.

► You don’t need to have more than 20% of your money in savings accounts.

► Keep 20% in fixed interest bearing securities like debentures and bonds. If you have put 30% in property for your children then consider putting 30% in debentures and bonds too. And if you have put 25% in property for your children then consider putting 35% in debentures and bonds.

► Keep a small amount of money nearly 15% in equity.

► Keep 5% in Gold too.

Asset allocation for Married & have kid ►►► Age between 40-60 years

At this stage in your life you need to build wealth and property for your children. You may not be willing to take risk because at present you have major responsibilities. Your asset should be allocated as follows :

► You need to plan for your children. And may be you should begin to focus on money for your children’s marriage. Keep 30% of your money in property.

► Invest around 30% in equity market. If you think this is too much, then you can rethink and make this portion to be little less, say 25%.

► You should have around 15% of your money in savings accounts. If you have invested 25% of your money in equity market, you can think of putting 20% of your money in your savings accounts.

► Keep 15% of your savings in debentures and bonds to earn fixed income.

► And keep 10% in Gold too.

Asset allocation for Married & have kid ►►► Age between 25-40 years

At this stage in your life you need to plan for your children’s future. You may not be willing to take risk because at present you have major responsibilities. Your asset should be allocated as follows :

►  You need to plan for the days ahead, not only for yourselves, but also for your children. And may be you should begin to focus on money for children’s education. Keep 35% of your money in property.

►  Invest around 35% in equity market. If you think this is too much, then you can rethink and make this portion to be little less, say 30%.

►  You need to have more than 10% of your money in savings accounts. If you have invested 30% of your money in equity market, you can think of putting 15% of your money in your savings accounts.

►  Keep 10% of your savings in debentures and bonds to earn fixed income.

►  And keep 10% in Gold too.

Asset allocation for Married & Have Kid ►►► Age less than 25 years

At this stage, your main concern is to have a property as well as to plan for your children future. Here, you may afford to take risk. Your asset should be allocated as follows :

►  You need to plan for the days ahead – not only for yourselves, but also for your children. But a property of your own is your top priority at this stage. Keep 40% of your money in property. If you think this is too much,  make this percentage to 35%.

►  Keep a decent amount of money around 40% in equities. If you think this is too much, make this percentage to 35%.

►  You need to have around 10% of your money in savings accounts. Here, if you have put 35% each in property and equity, then put 20% in savings accounts.

►  Invest 5% of your savings in debentures and bonds to generate fixed income.

►  And keep 5% in Gold also.

Asset allocation for Married & No Kid ►►► Age between 40-60 years

At this stage in your life you just want to plan for your retirement so that later you and your spouse may have a healthy post retirement life. A relaxed and tension-free life is always advisable at this age. Your asset should be allocated as follows :

►  Keep a decent amount of money around 35% in equity. Or if you want less risk, you can think of keeping 30% to equity.

►  Hopefully, you have already made your investment in a property. Keep not more than 25% of your money in property. If you have put 30% in equity make this portion to 30% too.

►  You need to have around 15% of yor money in savings accounts. If you still need some more liquidity, set aside more percentage.

►  Keep 15% in debentures and bonds to generate fixed income. If you have put 20% in savings accounts, then make this portion to be 10%.  

►  And keep nearly 10% in Gold.