Secure Financial Future - Translate Dreams into Goals

By Andrew L D'Cunha

John’s dreams and savings:

John Miranda is working in Saudi Arabia since 1988. He could not save for himself during his early years in Saudi Arabia as he had to repay the loan taken by his parents for building a house and also had to spend most of his savings for two of his sister’s marriage. He got married in the year 1992. The couple is blessed with 3 children - 2 girls and one boy. On recommendation of one of my client, he visited my office in September. The main purpose of his visit is to plan how to fund the Engineering Education of his eldest daughter who is 18 and also plan for the higher education of his 17 year old second daughter.

John was a very good saver. He never wasted his money rather spent his earnings either for his family needs, for his vacation and saved it. His real savings started in year 2003 when he changed his job with a good salary. He started saving 12000-14000 in bank deposits and in interest free chit funds in Saudi. He proudly showed me more than 30 fixed deposit receipts. Humble man he is! Never forgot to thank bank managers for helping him to save and deposit in bank. He had a very good relationship with the bank manager and every time when he visited the bank he was treated with tea and priority service at the Manager’s cabin. However, while looking into his savings I was shocked to see that almost all his fixed deposits are in NRE deposits at yearly interest rates ranging from 3% to 4%. He even taken loan against his gratuity and deposited in bank. He has saved almost 16 lakhs and current value is approx 18 lakhs.

Rs 18 lakh savings and dreams:

John’s health is not supporting him to work more than 2 years in Saudi Arabia. His age is 55 and he wants to settle back in India by 2014. As he spent most of his life away from his family, he is longing to spend time with his family. His main worry is how he can manage his future with his 18 lakhs. He exclaimed, “I worked very hard and sincerely for my family, saved money in discipline sacrificing my own needs”. His immediate requirement is Rs. 10 lakhs for his daughter’s engineering course. Now, if he pays Rs. 10 lakhs just as fees/donations for her course, he is left with only 7 lakhs. He was sad when he discovered that his bank manager refused to give him loan for education and even not invited him inside his cabin.

The sad part is he is even not aware that Banks have increased the interest rate from 3.5% to 9.5% for NRE fixed deposits. Few of his fixed deposits made in 2008-10 are long term deposits maturing in 2014-15. He is not aware that he can break those deposits and re-deposit the same with higher interest. Bank staffs or manager never bothered to give this advice to his customer who is banking with him since 20 years. When I called the bank manager and asked him, they agreed to do it immediately. I gave him whatever advises that I could give him considering his age, financial situation and his goals. His dreams – First daughter Engineering, second daughter MBA, son- Engineering… When I mapped his dreams as his goals on paper, John looked helpless:

From dreams to goals - estimate

Based on the simple life style of John, I estimated the amount required to meet his goals as below:

Apart from his LIC endowment policy where he pays approx Rs.3000 as yearly premium and few gold jewellery of his wife and daughters, he does not have any other savings or investment. How can John fulfill all his above goals (required funds approx 96 lakhs) with his present savings of Rs. 18 lakhs + another 3 lakhs gratuity?

He had left with no options but to compromise with his and children’s dreams. When he realized his mistake he said with low tone “I worked so many years in gulf just to give good education for my children!”

Now where did John go wrong?

He saved every month without a clear goal. (Saving without a goal is like travelling without a destination, we reach nowhere)

He did not save his money on right investment options. (yes, he saved regularly but inflation eroded his power of money. He saved at an average rate of 4% whereas inflation increased at a rate of 8% and education cost inflation increased at a rate of 10%). It is important to invest savings to beat inflation and retain the purchasing power of money. From my interaction with John I understood that he was willing to accept some risk on his investment. However, he never took inflation into account and never bothered to explore the various options available for savings/ investment.

He did not discuss his finance with anybody including his spouse. In spite of having sufficient savings, the absence of proper direction leads to losses. John blindly followed what bank manager suggested him. He thought if he saves money in his wife’s name she will spend more. This is one of the narrow thinking of many investors who are reluctant to discuss their finance with their spouse.

What could John have done ?

During last 10 years, If he kept his monthly savings in NRO deposits or in the name of his wife at an 8% interest rate, his present savings value would have been approx 25 lakhs, 7 lakhs, more than his present value. To save 7 lakhs, John need to work minimum 3 - 4 more years in Saudi. In other words, John lost 3 - 4 years of his retirement life just because of his ignorance.
 
If he had diversified his Rs. 14000 monthly savings in various asset class/options such as Bank deposits, Post office savings, gold and also in mutual funds and achieved growth of 12% during last 10 years, his present savings value would have been approx. 32 lakhs i.e 14 lakhs more than his present value. To gain this 14 lakhs John need to work additional 7 years in gulf. In other words, John lost 7 years of his retirement by sticking to only one saving option.
 
Yes, in both above cases John would have saved more. But again, he cannot fulfill all his dreams or meet all his goals through above 1 and 2 options. A sudden medical problem will jeopardize his savings. Now, as he don’t want to compromise with his dreams of giving higher education to his children, he had no option but to continue his work for few more years and save / invest his earnings in appropriate options.

How John could have fulfilled his dreams?

By translating dreams into goals - The first step to financial discipline is to have a dream, then set up goals: a plan with distinct steps. Translating dream means taking what one can imagine and making it achievable. A goal is not a goal until it has been made measurable by both amount and time. In case of John, when his first daughter was born, his dream was to give her the best of education. He had a dream of giving her first daughter - engineering education. However he had not set it as a goal with both amount and time. He was aware that Engineering Education will cost minimum 2-3 lakh in 1995. But he never thought that it will cost minimum Rs 15 lakhs in 2013. Education cost in India has increased in excess of 10% every year. If we consider 10% yearly education inflation rate, education cost of Rs. 3 lakhs of 1995 will increase to approx Rs 16.5 lakh in 2013.
 
By selecting right route and right investment vehicle for each goal -. Defining a goal (destination) is essential as it has direct impact on deciding the route and a vehicle one choose to reach. How can a person like John who saves Rs. 10-15 thousand monthly, fulfill all his dreams (approx 90 lakhs) just by saving in conservative investment options like Fixed deposits/NSC/Provident Fund which offer 8% yearly return? If income increases at a slower rate than inflation, your standard of living declines even if you are making more money.  Investors investment should grow atleast yearly 12% (more than the inflation) to accumulate sufficient amount to meet their goals. Table below shows the investment returns at various growth rates for investment period of 18 years. By starting to save aggressively earlier on, you will have the power of compounding working for you longer.
        

An ideal portfolio for John to meet all his goals would have been as below:.

A quote for risk says: “A ship is safe in harbor, but that's not what ships are for.” ― William G T Shedd

Too conservative approach may mean you don’t achieve your financial goal causing an individual to either delay completely his retirement plan or worse which forcing him to take loan at the time of retirement!. Risk is natural part of investing. Every investor find his/her comfort level with risk and construct an investment strategy around that level. Risk is a personal decision of each investor. Young investor can afford higher risk than older investors because they have more time horizon.

You may be Conservative or Moderate or aggressive. Assuming your savings are Rs. 25000 monthly and time horizon is 18 years (goals such as children Education, Marriage, retirement) portfolio can be constructed as follows.
 

From above portfolio Aggressive will earn additional 68.5 lakhs as a reward for taking risk - which is more than his investment amount of Rs. 54 lakh (Rs. 25000 x 216 months).

Recent survey on financial literacy indicates that although urban consumers have some level of knowledge about various financial products, they appear completely out of sync when it comes on deciding where, when and how they need to allocate their finances.

Through a proper mix of Debt, Gold, Equity, investor can generate a return of 12% or more over a long term. The proportion that one can allocate each of these asset classes depends on investors age, risk appetite, disposable income and time horizon.

Diversified investment portfolio through effective asset allocation is the best to achieve the long term goals. Being part of the growth of well managed business of India, through direct investing or through mutual funds plays a key role in achieving the highest returns for a given level of risk. Goals at least risk asset class provides lowest return for long term. Conservative investment options take greater role when investor reaches the last stage of long term financial goal. Investors can shift asset mix towards more conservative investments, as the need for asset preservation increases when they start drawing income from their accumulated assets.

This article is not for John but for those who don’t want to follow John, for those who want to plan for their future by translating their dreams into goals and save/invest in right assets based on your saving amount, time horizon and risk taking capacity.

The writer is Certified Personal Finacial Advisor and Managing Director at Win-Win Fin Advisory Pvt. Ltd, can be contacted at email: finadvisoryltd@yahoo.com. Cell: +91 9980202153.