My Tenth Cent

In Part 1 of this series, we covered the importance of Financial Planning. We also covered, some of the notions ingrained in our minds that drive our attitude towards money. Now in this article we will get a deeper understanding of the basics of financial planning. Financial Planning has 4 pillars and we will cover the first 2 pillars in this article.

What is financial planning?

Financial planning is nothing but a plan to secure your future. So, you are well prepared for a whole lot of scenarios; including the worst.

Warren Buffet’s quote aptly summarizes financial planning

“Someone is sitting in the shade today because someone planted a tree a long time ago”

In a nutshell a good financial plan will:

1. help you take stock of your goals, needs & wants
2. give you a sound & workable budgeting / savings plan
3. give you an appropriate investment plan
4. ensure you have a robust security plan

These are also the 4 pillars of financial planning. We will look at these in detail below.

Goals, Needs & Wants

It is very common to see people being fuzzy when it comes to goals, needs and wants. People set unattainable goals and often their wants as needs.

Goals

I have come across people who think that they can retire only once they have INR 25 crores of net worth. When I heard this number I wondered do you really need that kind of money? When I ask them how did they arrive at that number, quite often there is no answer. Another case that comes to my mind is a person whose retirement goal was again 30 crores (4 million dollars). He wanted to save 15 crores for himself and another 15 crores for his 2 children. In US people retire and live a fantastic life for 7 to 10 crores equivalent (1 million dollars). Why would he then plan for 30 crores (4 million) in India?

I hope you get the drift? Most people have just not given a serious thought to their goals. How realistic are their goals and how to achieve them?

Needs and Wants

Needs and wants is another area which confuses everyone. Paying your grocery bills, utility bills, children’s education so on and so forth are all needs. There is no confusion there. But when we move to the next level i.e., shopping and lifestyle expenses, that’s when confusion starts. In today’s consumerist culture almost, every aspirational want is a need, at least that is how most of us think.

Now it is not my place to question or justify whether a vacation or a luxury purchase is a need or a want. Absolutely not. But I would ask a couple of questions. I ask these questions to myself to help me get a better perspective.

Q) Would the expense you are about to incur, give you joy & happiness or are you spending to keep up the pretext?

Q) Would you still find joy in this expense looking back 1 year from now?

Also we need to remember that happiness from experiences often triumph over happiness from purchases. I have seen people find more happiness in experiences. The time spent with family & loved ones stay in our memory much longer than the memory of the items we buy. So it is important that we spend our hard-earned money on things that will truly matter. This is also because every penny saved takes us closer to financial independence and freedom.

How often have we fantasized of having so much money that we don’t need to work anymore? The true freedom to do whatever we want? And to achieve true freedom from the shackles of a job we need to focus on:

1. Goals: Have achievable goals. At the very least you should have specific goals for:
   • Children’s education
   • Retirement
   • House
   • Other high value aspirational items
2. Needs and Wants: Distinguish between your needs, wants & aspirations. Realize that it is not possible to achieve all your wants & aspirations. So spend money on where it counts the most but only after leaving money to secure your future.  Try to find the balance and to find the balance you need a good budgeting plan

Budgeting

“What gets measured gets managed”

Peter Drucker

People often don’t have a budget because it is too tedious to track your expenses and spend as per your budget. It is easy to focus on paying credit card bills and invest whatever left. But if you are serious about achieving your financial goals, then this approach won’t work. You need a budget and a way to track your expenses. Its as simple as that.

Now there are many ways to do budgeting. I have listed below some of the interesting concepts on budgeting that I have come across:

• Balanced Money Formula: 50-30-20 method. 50% of income for needs, 30% for wants & aspirations and 20% for saving.
• Cash Only Budgeting: You decide budgets for various items. Then withdraw cash and put it in envelopes. Once the cash in an envelope is over you cannot spend further till you replenish the envelope next month.
• 60% Formula: 60% of income kept aside for expenses. Then divide the remaining 40% into 4 buckets. 10% each for Retirement, Long Term Savings, Short Term Savings & Fun Money.  
• Value based Budget: You list down what you value the most and then spend accordingly. If you value travelling or buying latest electronic gadgets then keep money aside for that. You may have to cut money somewhere else. But you know what is important to you and you are spending accordingly. This seems good for people for whom savings come naturally. Otherwise, you would just end up spending all your money on what you want and save nothing

You can do your own research and figure out what method works best for you.

My philosophy is “Pay yourself the first 20% and know what you value the most”. This is quite simple.

• When your salary hits your account remove 20% for future goals. Plan your expenses with the remaining 80% only. Don’t ever dip into this 20%. – This is the “Pay Yourself First” principle
• Then pay all your outstanding bills, rent etc.
• Everything else with whatever left and then also spend on items you value the most.

This may be difficult at first for prolific spenders. But if you stick to removing 20% month on month, then over the course of 2-3 months you will be able to streamline your finances.

If your problem is so chronic that you can’t still discipline yourself, then cancel your credit cards. Leave one credit card in your locker at home for emergency and never use it for anything else. All your expenses from the cash lying in your account. Once you get control, then go with the sequence listed above. First 20% for yourself, then your bills & dues and splurges only after.

Conclusion

We conclude part 2 of the series with the first 2 pillars of financial planning i.e., Goals & Savings Plan. To sum up, it is important to understand & differentiate your goals, needs & wants. Only then you can save money towards your goals and achieve financial freedom. To do that you need a good savings plan.

I hope you enjoyed reading this article. This is a good time to take a break and assess how you are faring in your financial planning journey.

A free expense tracker will be made available on this website soon. The expense tracker will allow you to record your Goals and help you in Budgeting. It is quite simple to use. One tip before you start using the expense tracker. Move all your expenses or as much possible to online or UPI. This would make it easy to track the expenses. Then at the end of the month or the quarter take 1 hour to record your expenses onto this tracker. You will notice that over a period of time this tracker will become a very good database of your savings plan.

All the best and see you in the concluding part of this series.