Date : 28 April 2017
Whenever the subject of discussion is planning for your future, the hot topics are “Buying a car in the next five years or upgrading the car in 3 years”,”Buying a house in the next 10 years”, “Funding for kids’ education after 15 years”, “Planning for Retirement after 25 years”, etc. And then we save and invest for each goal. The agenda is to organize your finances by following the plan, and live a peaceful life. Our investment planning revolve around these long term goals. And that is what Financial Planning all about.
But then while planning for your goals in the “years to come”, what is often ignored is the “months to come”. We seldom plan for the near term goals. We are so organized with our child’s higher education expenses, that we somehow forget about his quarterly school fee. We care for upgrading our car four years down the line but forget about the annual insurance of our car which is due six months hence. And then when these expenses suddenly arise, you strain your brain, you drain your accounts, you look for money kept at home, at times go to the length of even asking a friend, and after all this physical and mental labour, you pay off the dues.
And after all this exercise, when your energy is completely sucked out of your body, two days later, your wife comes to you and says, “Our anniversary is coming, Kahin ghumne chalte hain”. You just can’t control your temper and the RDX comes out, “Pura budget bigad gya hai” “Monu ki fee bhi deni thi, upar se chacha ji ke bete ki shadi ka kharcha, aur tumko anniversary manani hai”. Your wife goes away without saying a word. This is “Toofan ke pehle ki shanti”, and you know your wife well. So, now you have two more expenses coming up: One, the cost of taking your wife for dinner that very night, or else you are not getting dinner for time immemorial. And Two, the anniversary trip expense.
The purpose of this fable was not to scare you off, “Beware of your wife”, rather it’s about don’t leave the short term expenses to luck. At times, near term expenses all bump in together, and sums up to a huge amount, which can disturb your finances and peace.
So how to plan for short term expenses?
Planning for short term expenses is also an important part of your overall financial planning. Many near term expenses are known, like you know you have your anniversary coming, and many of them are unexpected, like you may not know at the start of the year that your kid has to go for an educational trip next month for which you’ll need an extra 10k.
1. Provide for the expected: Look at the brighter side, you know beforehand that you will need an X amount of money on an X date. So, you can set aside the required amount for these expenses. After all, celebrating birthdays and anniversaries are also a part and parcel of life, they give you the small doses of happiness which, may be unknowingly, but keep you going.
2. Provide for the unexpected: Like you plan for long term emergencies, be prepared for the short term urgencies as well. Keep aside a small amount for these expenses, so that whenever something pops up, you can close it by paying the requisite amount from your short term piggy bank, without turning your happy life topsy-turvy.
3. Don’t stretch your investments to the extent that you cannot afford to buy milk: We do advise you to save and invest. Yes you do need to stretch a bit and invest to have a secure financial future, but don’t stretch to the extent that you break your bones. If your monthly income is Rs 30,000 and your fixed expenses are Rs 15,000, so you cannot afford to invest the entire remaining Rs 15,000 for your long term goals. You need to keep a buffer to meet your upcoming near term non-discretionary as well as discretionary expenses.
4. Invest in Liquid Funds for Liquid Expenses: Do not invest in bank fixed deposits or PPF for short term expenses, because you may not be able to access the money, when you need it, or even if you do, you may incur a penalty on withdrawal. Do not keep your money at home or in your bank saving account either, as they will give you zero or meagre returns which will not even cover the cost of inflation. Invest these funds in Liquid Funds, so that you can withdraw the money whenever you need plus you get the benefit of yielding higher returns as compared with the above mentioned options.
5. Do not take Risk for short term goals: When it is about short term goals, it is advisable to stay away from volatile asset classes. For short term goals, the factors to consider are Liquidity, Safety of principal and Taxation. So there are two options which can provide you liquidity, safety and returns that are better than the traditional bank saving deposits. One is Liquid Fund in the Debt category and the other one is Arbitrage Fund in the Equity category. Arbitrage Funds, though are Equity funds, but they are least volatile and their returns are comparable with Liquid Funds, and they may offer certain tax benefits. The choice between Arbitrage funds and Liquid Funds should be made depending on your income profile after consulting with your financial advisor.
So, the bottomline is, Financial Planning is very important to keep your finances organized and lead a peaceful life. But peace can come only when you plan for both short and long term term. Planning only for the long term and ignoring the short term can break the constant of your life every now and then.