Goal-Plan-Action for Finance planning

This is the follow-up post for my previous post "The importance of goal setting in financial planning". I will take the  theme of my previous post and discuss how to achieve it using some of the tools available.

Goal->Plan->Action

Goal Setting:

Let us take an illustrative example of one Mr.T.R aged 28 want to save money for his kids education. His kid Simbu is now 2 years old. He needs to address these following things to come up with the goal

• Name of the Goal  :  Simbu's Education Fund
• How much money he need now:  10,00,000 (He should answer how of much money he needs now if Simbu is joining college today)
• Years till Simbu joins college: 16 years

Plan:

Now Mr.T.R clearly defined all the key parameters of the goal, we need to plan how much money is needed after 16 years.  If we assume that the education expense grow 8% every year,

this calculator clearly shows that Mr.T.R needs Rs.34,259,42 after 16 years to meet the education expense of Mr.Simbu.

(Calculator used: Future Value Calculator)

Now we need to calculate how much money Mr.T.R needs to invest every month for the next 16 years to reach his goal.

I use the "How much should I Save to Reach My Goal? calculator from yahoo finance" assuming 12% returns from the investment which is modest. 

this calculator shows me that Mr.T.R needs to invest Rs.71547 annually (Rs.5962 monthly) to achieve his goal. If he has any savings currently he can also put that in current savings balance.

If we cant invest 71547 now, we can opt for a lesser amount now and increase the investment every year, you can play around with the field annual increase on recommended savings to determine such value.

Action:

Next thing Mr.T.R needs to do is to pickup a 5 star rated equity mutual funds from www.valueresearch.com and start investing Rs.6000 through SIP (Systematic investment plan) for the next 16 years. Mr.T.R should not worry about ups and downs in the market and keep investing in equity. The only advice is that he should review the plan once in every year and switch to other plan if it under performs the category average.

To track the growth I created a spread sheet which looks like this (The funds mentioned are just for illustration and not for recommendation)

Similarly Mr.T.R needs to set goals for Simbu's marriage, Kural's education etc. We will talk about retirement planning sometime later.


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