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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Expense tracking and Budgeting tips

Every time when I go for a trip and return home my mom use to calculate the expense and note it in diary. I used to make fun of her but now I started realizing the importance of it and started following it. The most common  problem is we often we forget to remember whom we have lent and how much. I will try to explain here on what are the various ways/tools I followed to keep track of my expenses.

Excel template:


My friend shared me an excel template called KharchaPani(Download), thanks for the unknown creator of this template, its a life saver. I started entering daily expenses and loans I took/gave. It is very simple and gives a basic chart for  your income vs expenses. The problem I faced with this is you have to always track the latest version and the merge issues if you have two copies one at home and one at office. This tool can be an alternate for online tools available for those who are afraid of privacy.

Buxfer:


I then moved on to an online expense tracking tool Buxfer. I used it for almost 5 years, its free and it has lot of features that reduces your manual work. It allows you synchronize with your bank account (For Indian users it allows only ICICI and HDFC).

You can create Wallet as an account and store the amount in you wallet and add manual transactions daily. For the transactions that you made with your debit/credit card it will sync automatically with your bank account and create an entry here, only thing you need to take care is tagging the transaction.

There is feature to create automatic transaction which I use it for recurring expense like Loan, Rent etc. It creates an entry with predefined tag and also generate alert as sms or mail.

Buxfer is a really cool tool, it gives you a lot of analysis of how we spend and also gives you projections on whether you will overshoot your budget.


Intuit


Currently I started using free trial of Intuit for my expense tracking(Intuit Trial). The paid version comes at 402.80 per year. Intuit is known for their famous softwares like Quicken and Turbo tax. Intuit acquired Mint in 2009 and gained lots of expertise in online personal finance tracking tools.

Man I love this tool. You can synchronize almost all the major bank accounts in india. It also helps me to synchronize my portfolio from money control and form ICICI direct which is a major plus. I can view my entire financial status at one point. It has alerts and remainder too!!

Initially I was worried about the data security but my friend who is working for Intuit explained me about the level of security which somehow eased my initial jitters.

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The major advantage I gained after tracking my expenses are

• It induced my interest for learning other areas of personal finance.
• I can easily track the money I loaned.
• I stopped taking loans from my friends, since I budget every expense an year ahead.
• I always know how much cash I will have at any particular point of time for that year.
• I never missed my Insurance payments and bills.
• I started advising my Dad  :) 

Disclaimer: I suggest you to please analyze the security features of whatever tools you want to use and make an informed decisions.