Final solution – How knowledge of finance solve your problems!
Future is uncertain, money is complex product and knowledge of Finance is our only safety net (or Parachute or life jacket – you got it what I am saying). Therefore you need a good handle of Time value of Money concept. TVM required in everyone’s life to unlock the mysteries of Future and Money. Be sure that you will Rest in peace now and beyond. Here we have other set of ‘R’s
Realistic and Responsible Objectives
This one is difficult task but still, please set your objectives. It is important to attach financials or price tag to your Objective. Example – want to buy BMW 3 series, Exotic family vacation, buying an expensive Villa, travelling only by Business class etc. Other set of examples – setting aside money for Kids higher education, investment in stock market, start up a new venture, give away money for Philanthropic cause (yeah I know – Bill Gates and Warren Buffet story, acquire first and give later). All I am saying, please set your objective where you need Capital (on the asset side of your balance sheet). Once that’s done – look at the financing part of it i.e. Liability side. How do you want to Finance your objectives. Does your current earnings help you to achieve your Objective? If not, what are the alternatives – Move to higher compensation Jobs or take up assignments with higher saving potential or cut your existing expenditure etc. Long term view is always better than the myopic one. Your knowledge of Finance will lift you to a vantage point where you can see your future (how far, that depends on your knowledge and understanding). Do not set Objectives based on neighbor’s salary.
There is mismatch between nature of Jobs and life of Job span. Job market has been changing in every 20 years. Our job span is 30-35 years. New Technology turns around in faster rates than before and our extending longevity may extend your job span further. This will further skew up mismatch between Jobs and Job span. This will lead to the fear of obsolesces. This problem will confront every individual in their last leg of our career (last 10 to 15 years of working life). It’s important to have concrete Retirement plan (we are no more in Govt. Jobs where retirements are secured partially). This is easier than Objectives. Set your retirement year and your remaining life approx. another 20 years after retirement. Again look at your balance sheet – Asset side, what are the assets and cash you need on or before retirement. Consider no earnings after retirement. Use Future value of annuity to come up with corpus you need before retirement. Assumptions like I need cash flow of X amount every month for rest of my life after retirement. Now look at liability side on how to finance to meet your retirement target. Are you on course or drifted already? Course correct and make necessary changes in Income, expenditure and saving cycles. Stop old school thinking like I want to leave wealth for my next generation etc. Next Gen is capable enough to earn for themselves. It is advisable to add scenario “if I am not around” – buy sufficient term plan to cover all your liabilities, review nominees etc. It’s OK if you do not pass Assets to next generation, make sure that you are NOT passing any liabilities for sure.
Financial model in our favorite spreadsheet will help you to chart out Objective and Plan. However you can factor in your consumption patterns while calculating your retirement plan. This is somewhere between realm of finance and beyond. Our planet earth has finite quantity of resources. As we are growing in multiple dimensions – wealth, wisdom, wage and age etc. we must alter our consumption cycle. Less for mother planet and more for yourself. Do it voluntarily before medical condition warrants. It would be better to pay for good medical insurance now. Healthier consumption pattern will ensure simpler retirement plan. This will save you from considering various scenarios (such as health related events) around your retirement plan.
I cannot explain this in terms of finance, therefore you may call it nonsensical. Please create your sense of Wealth (similar to goodwill or brand value) without any proud or pretense. You may acquire wealth by visiting new place or country, knowing new culture or people, by knowing new knowledge area (books, training, courses), by leadership, by contributing around your neighborhood. It will be boring and unidirectional, just to consider Cash as wealth without Kind.
Reset your Goal
Life is long and getting longer. It’s also full of unknown events, therefore it’s important to reset your goal and re-plan time to time. I would say that, this should be your Year-end procedure so that you will have more clarity. It will be real waste if you can’t spend (read enjoy) what you earn.
One of my favorite self-help book is 7 habits by Steven Covey. It does not matter when you are starting, but always begins with the end in mind (2nd Habit)
Don’t shrug off and quip – “I have lot of time to do this”. I will just wink and say – “Really?”