'I must be cruel only to be kind,
Thus bad begins and worse remains behind.'

 

Hamlet, Act III, Scene IV

 

Hamlet may have experienced regret for his behavior towards his mother, assuaging his guilt in the fact that he was saving her from herself, but if there’s one thing everyone seems to be taking away from yesterday’s Budget, it is that the bad is beginning and regret will get us nowhere.

The Budget could be considered a disappointment from a personal finance point of view, among others. Or it could be considered realistic.

The Finance Minister works for the country, but not directly for its individual citizens.With the looming fiscal deficit and the urgent need to fix both growth and inflation, the common man has been given harsh medicine to effect the best national cure. In a situation where tax brackets have been marginally increased on the one hand and service tax has been greatly increased on almost every conceivable expense on the other, you must now remember that your personal finances could need some very careful handling.

With any finance matters, be they personal or national, the first thing you need to know is what you want to achieve. This becomes your aim, the target you want to achieve, also known as your financial objective.

The objectives that you set, whether they include buying a car, funding your child’s higher education, saving for your own retirement, can range from being immediate, to being very long term. So when setting up your objectives list, there are some things you should keep in mind.

1. Know Your 'What'

Let’s take the case of our favourite fictional character, Mr. Shah. Let’s say Mr. Shah is 35 years old with 2 kids and a home loan. There might be multiple things he wants to achieve in his life, but some will have higher priorities than others. For example, he might want to take a family holiday, buy a new car, plan for his kids’ educations and also his own retirement. Some of these goals are vital (kids’ educations, retirement) and others might be urgent (kids’ educations, new car), while others might be for peace of mind (holiday).

It's up to Mr. Shah to know which goal is in which category i.e. important, urgent, or discretionary. Once categories have been assigned, timelines and amounts should be decided. Does he want to spend more on a holiday and less on a car or vice versa? How much will be likely spend on his children’s educations in today’s terms? How much inflation is a safe enough rate to consider? This is where advice from his planner can help him make an informed decision.

2. Know Your 'How'

Once your objectives are set, you need to figure out how to achieve them. This is where your financial plan comes into play. Let’s suppose that one of your goals is to achieve Rs. 1 crore in the next 10 years. Let’s look at 3 rates of return, 10% p.a. 12% p.a. and 15% p.a.

Investment Objective	Rs.	10,000,000
Timeline	years	10
		Case 1	Case 2	Case 3
Rate of Return	p.a.	10%	12%	15%
Annual Investment Required	Rs.	627,454	569,842	492,521
Monthly Investment Required	Rs.	48,817	43,471	36,335

 

As can be seen, to achieve a crore in 10 years with monthly investments yielding 12% p.a., the required monthly investment is Rs. 43,471. If you extend this timeline to 15 years, keeping all else the same, the monthly investment required comes down as follows:
 

Investment Objective	Rs.	10,000,000
Timeline	years	15
		Case 1	Case 2	Case 3
Rate of Return	p.a.	10%	12%	15%
Annual Investment Required	Rs.	314,738	268,242	210,171
Monthly Investment Required	Rs.	24,127	20,017	14,959

If you want to build up a crore in 15 years with monthly investments yielding 12% p.a., you need to invest Rs. 20,017 per month. Clearly, becoming a crorepati is very achievable.

Conclusion

So remember, know your ‘what’ and then know your ‘how’. Your financial planner will be on hand to help you quantify your objectives, structure your cash flows and recommend the right mutual funds for you to invest in. And Budget or no Budget, your personal finances will stay on track under the watchful eye of your Financial Planner.

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