Need For Financial Planning

NEED FOR FINANCIAL PLANNING By Sanjeet Kumar Das 13 August 2006

Let’s start with a basic question – DO I HAVE A NEED FOR FINANCIAL PLANNING? The attitude is – I will plan my finance as and when I have requirement or I am too comfortable, it will all happen. But, how is it going to happen? Are you going to win a lottery or you always spend less that what you earn? Normally, we ignore some important decisions in our lives because either we don’t have enough time, expertise or patience. But have you realized the cost of your decision? Planning is something that has become very important in life and would grow in importance as the time pass by. There is a heavy cost of delaying the investment decision or not paying proper attention.

I am showing the working I have done. I have taken a hypothetical example of an individual. AGE – 25 Years RETIREMENT AGE – 50 years LIFE SPAN – 75 years

CASE 1. EFFECT OF DEAD SAVINGS A dead savings is when a person is just saving money without growing the investments and also not earning anything on the investments. ASSUMPTIONS Savings – Rs 10000 P.M Inflation Rate – 5.5 % Earning Rate – 0 % Savings Growth Rate – 0 %

CASH FLOW – WORKING LIFE PASS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

AGE 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

OPENING 0 120000 240000 360000 480000 600000 720000 840000 960000 1080000 1200000 1320000 1440000 1560000 1680000 1800000 1920000 2040000 2160000 2280000 2400000 2520000 2640000 2760000 2880000

ADDITIONS 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000

CLOSING 120000 240000 360000 480000 600000 720000 840000 960000 1080000 1200000 1320000 1440000 1560000 1680000 1800000 1920000 2040000 2160000 2280000 2400000 2520000 2640000 2760000 2880000 3000000

CASH FLOW – RETIREMENT LIFE PASS 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

AGE 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75

OPENING 3000000 2942067 2880948 2816467 2748439 2676670 2600954 2521074 2436800 2347890 2254091 2155133 2050733 1940590 1824389 1701798 1572463 1436016 1292064 1140194 979972 810937 632606 444466 245978

EXPENDITURES 57933 61119 64481 68027 71769 75716 79881 84274 88909 93799 98958 104401 110143 116201 122592 129334 136448 143952 151870 160222 169035 178332 188140 198487 209404

CLOSE 2942067 2880948 2816467 2748439 2676670 2600954 2521074 2436800 2347890 2254091 2155133 2050733 1940590 1824389 1701798 1572463 1436016 1292064 1140194 979972 810937 632606 444466 245978 36574

CONCLUSION If we are saving Rs. 10000 per month for 25 years, we can hope to get only Rs 1200 per month for 25 years during retirement (Taking inflation at 5.5 %). The working clearly shows that the investments would simply depreciate because of the fact that expenditures would appreciate. Thus, prime focus should be on earning so that the returns would beat inflation.

CASE 2. EARNING ON INVESTMENTS AT 8 % ASSUMPTIONS Savings – Rs 10000 P.M Inflation Rate – 5.5 % Earning Rate – 8 % Savings Growth Rate – 0 %

Now holding above conditions true, if we start assuming that we are earning at a basic rate of 8 % on your investments, we can hope to get Rs 9400 per month for 25 years during retirement (Taking inflation at 5.5 %).

CASH FLOW – WORKING LIFE PASS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

AGE 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

OPENING 0 120000 249600 389568 540733 703992 880311 1070736 1276395 1498507 1738387 1997458 2277255 2579436 2905790 3258254 3638914 4050027 4494029 4973552 5491436 6050751 6654811 7307195 8011771

EARNINGS 0 9600 19968 31165 43259 56319 70425 85659 102112 119881 139071 159797 182180 206355 232463 260660 291113 324002 359522 397884 439315 484060 532385 584576 640942

ADDITIONS 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000

CLOSING 120000 249600 389568 540733 703992 880311 1070736 1276395 1498507 1738387 1997458 2277255 2579436 2905790 3258254 3638914 4050027 4494029 4973552 5491436 6050751 6654811 7307195 8011771 8772713

CASH FLOW – RETIREMENT LIFE PASS 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

YEAR 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056

AGE 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75

OPENING 8772713 8984416 9186100 9375479 9550005 9706841 9842829 9954466 10037865 10088723 10102281 10073279 9995911 9863776 9669821 9406281 9064616 8635439 8108439 7472298 6714600 5821735 4778789 3569430 2175781

EXPENDITURES 453809 478768 505101 532881 562190 593110 625731 660146 696454 734759 775171 817806 862785 910238 960301 1013118 1068839 1127625 1189645 1255075 1324104 1396930 1473761 1554818 1640333

NET INVESTMENTS 8318904 8505648 8680999 8842598 8987816 9113731 9217098 9294319 9341410 9353964 9327110 9255473 9133126 8953538 8709519 8393163 7995777 7507814 6918794 6217222 5390496 4424805 3305028 2014612 535448

EARNINGS 665512 680452 694480 707408 719025 729098 737368 743546 747313 748317 746169 740438 730650 716283 696762 671453 639662 600625 553504 497378 431240 353984 264402 161169 42836

CLOSE 8984416 9186100 9375479 9550005 9706841 9842829 9954466 10037865 10088723 10102281 10073279 9995911 9863776 9669821 9406281 9064616 8635439 8108439 7472298 6714600 5821735 4778789 3569430 2175781 578284

CASE 3. EARNING ON INVESTMENTS AT 8% & GROWING SAVINGS BY 10 % P.A. ASSUMPTIONS Savings – Rs 10000 P.M Inflation Rate – 5.5 % Earning Rate – 8 % Savings Growth Rate – 10 % If we remain active with our investments and also ensuring that we grow our saving potential by 10 % (considering the fact that we do well in our job and expect a raise or a bonus), we can hope to get Rs 25800 per month for 25 years during retirement (Taking inflation at 5.5 %).

CASH FLOW – WORKING LIFE PASS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

YEAR 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

AGE 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

OPENING 0 120000 261600 427728 621666 847092 1108120 1409357 1755952 2153658 2608905 3128866 3721550 4395885 5161828 6030474 7014182 8126713 9383387 10801248 12399257 14198497 16222407 18497033 21051312

EARNINGS 0 9600 20928 34218 49733 67767 88650 112749 140476 172293 208712 250309 297724 351671 412946 482438 561135 650137 750671 864100 991941 1135880 1297793 1479763 1684105

ADDITIONS 120000 132000 145200 159720 175692 193261 212587 233846 257231 282954 311249 342374 376611 414273 455700 501270 551397 606536 667190 733909 807300 888030 976833 1074516 1181968

CLOSING 120000 261600 427728 621666 847092 1108120 1409357 1755952 2153658 2608905 3128866 3721550 4395885 5161828 6030474 7014182 8126713 9383387 10801248 12399257 14198497 16222407 18497033 21051312 23917384

CASH FLOW – RETIREMENT LIFE PASS 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

YEAR 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056

AGE 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75

OPENING 23917384 24485570 25025223 25529994 25992797 26405747 26760077 27046056 27252898 27368661 27380139 27272745 27030380 26635296 26067941 25306798 24328202 23106146 21612068 19814622 17679429 15168799 12241445 8852156 4951450

EXPENDITURES 1245561 1314067 1386340 1462589 1543031 1627898 1717432 1811891 1911545 2016680 2127598 2244616 2368069 2498313 2635720 2780685 2933623 3094972 3265195 3444781 3634244 3834128 4045005 4267480 4502191

NET INVESTMENTS 22671824 23171503 23638883 24067405 24449766 24777849 25042645 25234165 25341353 25351981 25252542 25028130 24662311 24136982 23432221 22526113 21394580 20011174 18346873 16369841 14045184 11334672 8196441 4584676 449259

EARNINGS 1813746 1853720 1891111 1925392 1955981 1982228 2003412 2018733 2027308 2028158 2020203 2002250 1972985 1930959 1874578 1802089 1711566 1600894 1467750 1309587 1123615 906774 655715 366774 35941

CLOSE 24485570 25025223 25529994 25992797 26405747 26760077 27046056 27252898 27368661 27380139 27272745 27030380 26635296 26067941 25306798 24328202 23106146 21612068 19814622 17679429 15168799 12241445 8852156 4951450 485200