Need to fund discretionary goals?
It requires you to be extra disciplined in accumulating the required corpus in a given time
We all are busy fending for our daily lives and are consistenly insecure about the future, children’s future and so on. As a result, many forget to pursue any other interest or dream. Very few people actually want to live it up their dreams. There may be many reasons for it, like too many responsibilities or not enough cash to satisfy their aspirations. But there is a need to ensure that ‘all work and no play does not make Jack and his family a dull family’.
The balance, however, is important. While the argument that since you live once, live it kingsize is important. But basic and boring things such as, insurance, investments, tax filing and so on have to done as well. For some, this motto is emblazoned in huge font size like the giant Hollywood sign. Many have fabulous incomes to show and hence their larger than life dreams don’t sound out of place. But making these dreams come true may involve burning a huge cash pile. That should be fine only if major goals are not compromised.
Important goals, which need to be accomplished in life are retirement, children’s education and future funding. The good-to-have goals would be something like a trip abroad, holiday home, buying a sports car, early retirement and so on. No harm in enjoying life to the fullest and who doesn’t want to; but do not compromise important goals. Else, you can only repent when the time comes for one of goals.
| LIVE LIFE KING SIZE |
| * Do not compromise important goals |
| * Do not borrow to fund discretionary goals |
| * Decide on the amount required and time in hand |
| * Invest regularly and keep a tab of it, in case it falls short |
| * Take one discretionary goal at a time lest you are left cash strapped |
| * If you aren't able to accumulate enough, do not dip into other corpus |
| * Consider extending the horizon but make up for inflation in that period |
Important goals will have to be planned and a proper funding mechanism needs to be worked out, right in the beginning. Funding for retirement for instance, can be primarily through one’s provident fund contribution, which would accumulate to a tidy sum by the time you near retirement.
Along with this, one also gets gratuity and superannuation fund, which could potentially be used post retirement along with some other savings earmarked for the purpose. Once this is done, stick by it. The main battle is won. Other goals can now be brought into focus like a foreign trip. For a family of four, a trip to Europe would cost about Rs 6 lakh approximately, today, like in case of Ranjan and his family. This would need to be funded and a time frame has to be decided for it. Say this goal will come up in three years. There are several ways to plan it.
Firstly, never borrow to travel. Accumulate the money and use it in the trip rather than spending what one does not have and repaying it over time in instalments. Here, you are cashing in on a future income, which may or may not be there and can pose problems for you. Spending what you have is always better.
One of the things that Ranjan can do is to invest his bonus and incentives, to accumulate the amount required for the trip. Ranjan gets about Rs 1 lakh per annum, as bonus. He can invest this now and in the future years, so that he ends up with the required corpus. But this is estimated to get him to about Rs 3.5 lakh, post tax. He needs another Rs 2.5-3.5 lakh.
The other thing he could do is to contribute on a regular basis to help accumulate the amount required. He is investing about Rs 18,000 monthly, out of which Rs 15,000 needs to be invested, for the long term goals. Hence, Rs 3,000 can be used for this goal. This will help him accumulate another Rs 1.3 lakh, in three years. He would have accumulated Rs 4.8 lakh, by doing this in three years.
What we need to understand is that his foreign trip will cost close to Rs 7 lakh then, as inflation in the intervening three years would have pushed up the costs. So, he would be short by Rs 2.2 lakh, at that time.
He would still need to do something more. Ranjan’s income would increase too, and he feels that in the next two years, he would be able to put aside the extra earnings to the tune of Rs 1.2 lakh. While this is possible, this is still uncertain. Hence, Ranjan should understand that his trip abroad is conditional on the hikes he is counting on.
He will still be short of about Rs 1 lakh. Alternately Ranjan could tighten his belt and reduce his expenses a bit. This can release some money which could go towards the travel kitty. This is easier said than done as this needs to be done in a disciplined manner month after month to get the results here. Ranjan is confident that Swati, his wife would do that.
The other thing one could look at is diverting income of the spouse towards a goal like this. In their case, Swati earns by giving private tuitions. She gets under Rs 1 lakh a year, which she has been investing for their daughter’s marriage. She however, is willing to fund the shortfall of Rs 1 lakh from her accumulated corpus.
They are happy that they can make it happen. Apart from the fact that they will enjoy the foreign jaunt, it is a feeling of accomplishment, when they plan and achieve such a goal, which seemed unattainable for long.
But, this is only one such goal. They have many such goals. One of them uppermost in Ranjan’s mind is owning a holiday home in Himachal Pradesh. While some may want to own a fancy car or take a sabbatical from work to delve into their hobby for a brief period like taking lessons in deep sea diving.
That also needs to be planned. When there are multiple discretionary goals, it is a tight rope walk. But they are quite achievable as well with discipline and careful planning. All one needs to do is prioritise right.
One has to be prepared to scale down or drop a goal, if it cannot be accomplished without jeopardising any of the important goals because discretionary ones can be shifted but not the important ones.
The writer is a certified financial planner