I have come across a lot of people while discussing about future payouts of their investments say “How much value this amount will hold after 20 years” “What will I achieve with these Peanuts” My answer to them is “Sir, saving Peanuts will give you Peanuts only”. Its Human to have minimum cash outflow and maximum cash inflow that is save less and expect more.
What do you think would be the right amount of savings….. And how do you know how much is enough?
Saving habit has to be developed but more importantly it should be the right amount. Some people save less because they cannot afford…but some people save less because they are unaware as to how much is to be saved. They are either sacred to get a reality check or they don’t have the ability to judge the right amount.
Here are few steps that help you save right:
1. Identify your priorities:
Retirement, Child education, Child marriage, Trip around the world, a Penthouse , a Big Sedan you always wanted to be yours etc can be the goals in one’s life. You’ve carved out some money in your budget that you earmark as “savings.” That’s a great first step.
2. Get hold of the Present values:
The next step is to take out time to get hold of present cost of your goals identifies.While planning for Finances for retirement, you need to check the amount that is required today to run your household or if you dream of your child as a doctor, check out the cost required in today’s term.
3. Calculate Future values:
Remember the formula for future value we learnt in school.
The same can be used to determine the future value of the present value gathered in the previous step. For example: For calculating future monthly requirement post retirement after 30 years, inflation =8%, current monthly expenses are Rs. 50000,
FV= 50000(1+.08)^30 will give you your answer i.e Rs.500000(5 lacs approx).
It is very important to ascertain this value as savings will be done accordingly.
4. Start saving as per future values:
What most of us generally keep in mind is present cost while planning with investments. This is actually a Blunder. We can go wrong in a big way.
Prevention is always better than cure– and here there will be no cure as major element involved is time which can not be reversed.
What our elders did was, they planned in a random way without keeping a figure in mind…so most of them either underachieved their goals, had to cut down on their goals or are still working as they cannot afford quit working considering high inflation which they were not able to foresee.
5. Fill in Gaps:
Once the identification and determination process is complete, then comes in picture, how to fill the gap.The problem is to bridge the Gap which exists between where you are now and the goal you intend to reach. Plan your investments in a disciplined and systematic way which not only gives good compounding returns but is also not burdensome on your planning as saving small amounts in a disciplined way can actually help goal achievement.
So, Ask yourself again “Are You Saving Peanuts?”
What you sow is what you reap… Saving peanuts will give you Peanuts only. It goes without saying “If we don’t Plant the right things, we will reap the wrong things.”
About the author : Gurleen Kaur is a Financial Consultant and devotes her time to her company www.hareepatti.com. She has done her Bachelors in Finance and Investment Analysis(BFIA) from College of Business Studies(CBS, Delhi) and MBA from IMT, Ghaziabad. She will be a Certified Financial Planner soon. She can be Contacted at gurleen@hareepatti.greatestdesignever.com
Images have been sourced from google.com.