What can Repiblic Day teach us about Financial Planning
India gained its Independence in 1947 . At that time India was free , and ready to grow on its own , with its own decisions . But it was not possible without a set of guidelines to guide the decision making process . Success comes when you are disciplined and have a decision making process. On Jan 26 , 1950 our Constitution came into effect and now we had laws for different things .
We knew exactly what we have to do when thing happens . We had a road map to follow . From there on we progressed and have came a long way . We can now say that we are much better than we were at that time and we continue to grow and make better decisions .We need amendments from time to time and that helps us to change the bad laws and adapt to new situations .
*How do we relate it to Investing ?*
We can learn from anything … really anything . Let us try to map each event discussed above and relate it to our Investing world .
*1. Gaining Independence*
When we get a job and start earning on our own , we are full of confidence. we are independent , We don’t need to ask for money from our parents . Rather we have to support them . We have responsibilities . There are many goals for us like buying house , car , saving for our retirement , Marriage etc etc .
*2. Republic day*
This is the day when we understand that we need to do our financial planning and have a set of guidelines to guide our decision making regarding our investments .When we know how exactly we are going to invest to achieve our goals, we have a clear road map and time duration . We just need to follow it with discipline.
*Example : If a young 25 yrs old want to retire at 55 with 2 crores at the end . He can take two approaches .*
a) He can try to save money here and there , some month he can invest 10k , and some month he can skip it and down the line , he has a vague idea where is he going and how is he making progress . This kind of approach often leads to failure, because there is no road map and sometime will come when you will have no idea whats happening .
b) Second approach can be very easy . You have to make sure that you understand some thing very well and be clear about somethings. Those are
– Equity outperforms every other asset class in long term .
– Equity in long term has given 15%+ returns and its possible in future too .
– You should have understanding about the power of compound interest.
Now when you are clear crisp about this idea , then you can use a simple compound interest formula to see , how much you need to invest every month for rest 30 years (55 – 25) , which can generate 2 crores at 15% annual return .
The formula is
rate = monthly rate = 15% / 12 = .15/12 = .0125
months = total number of months you will invest = 30 * 12 = 360
Now you can calculate what monthly_contribution fits the values .
The amount comes to little below 3,000 per month .
Which means if you invest 3,000 per month for next 30 years , you can achieve your retirement target easily without fail . (Invest in Equity Diversified Mutual funds to target 15% returns for long tenure).
When you do this , you go with a plan (constitution) and dont have to doubt your self and you will not get lost . Just follow it with discipline without fail.
Just like amendments are made in Law , because of change in environment and situations . You also may have to change you plans with market change and new products coming in (this happens rarely , because fundamental things remain same) .
*Summary and Learning*
What I want to point out here is that just earning money and being independent in not enough and cant make you successful with money , Discipline and proper understanding with good planning will help . So if you are Independent but have not put your constitution in place , do it soon to really succeed . Make this day as your teacher and learn from it . Dont be afraid of mistakes .