Financial Planning Lecture Notes

Jul 2, 2024

Financial Planning and Budgeting Lecture

Introduction

  • Monthly salary: ₹30,000.
  • Three major budget categories: Needs, Wants, Investments.
  • Needs - essential expenses (rent, utilities, groceries, etc.).
  • Wants - non-essential but desired items (gadgets, vacations, dining out, etc.).
  • Investments - long-term savings and financial goals (buying a house, retirement, children’s education, etc.).

Budget Rule: 50-30-20 Ratio

  • Needs: 50% of income.
  • Wants: 30% of income.
  • Investments: 20% of income.

Detailed Budget Allocation

Needs (₹15,000)

  • Rent: ₹7,000 (assumed for Delhi/Bangalore/Mumbai).
  • Groceries: ₹5,000 (home-cooked, shared expenses).
  • Utilities: ₹500 (electricity, water).
  • Mobile Bill: ₹500.
  • Clothing: ₹500.
  • Transportation: ₹3,000 (assumes public transport, occasional auto/ride-share).
  • Internet: ₹500.

Wants (₹9,000)

  • Vehicle EMI: ₹3,000 (e.g., bike/scooty).
  • Phone EMI: ₹3,000 (for a good phone).
  • Vacation Savings: ₹1,500 (₹18,000/year for vacations).
  • Clothing: ₹500 (additional beyond essentials).
  • Dining Out: ₹1,000 (occasional dining).

Investments (₹6,000)

  • Stock Market: Suggested split - Nifty 50 Stocks (stable/top 50 companies), Mid-Cap, Small-Cap.
  • Average annual returns: Nifty 50 (12%), Mid-Cap (15%), Small-Cap (18%).
  • Allocation Sample: 60% Nifty 50, 25% Mid-Cap, 15% Small-Cap (modifiable).
  • Long-term goal: substantial savings and wealth accumulation.

Increment and Adjustments

  • Annual Increment: Assumed 10%, divided equally among Needs, Wants, Investments.
  • Example: After year one, salary becomes ₹3,60,000 pa (₹36,000 increment).
  • Needs, Wants, Investments - each increases by ₹12,000 annually.
  • 10 Years Forecast: Salary ~₹8,50,000, Needs ~₹31,000, Wants ~₹25,000, Investments ~₹22,000 per month.
  • 20 Years Forecast: Salary ~₹19,00,000, Needs ~₹60,000, Wants ~₹55,000, Investments ~₹50,000 per month.
  • 50 Years Forecast: Salary ~₹75,00,000; equates to ₹2,22,000 for Needs, ₹2,00,000 for Wants, ₹2,13,000 for Investments.

Long-Term Planning

  • Starting early (e.g., at age 22-23), significant wealth can be accumulated by 30-32 years, enabling home purchase or other major financial goals.
  • Example: ₹16,00,000 in 10 years for a down payment on a home.

Realistic and Disciplined Approach

  • Consistent budgeting and disciplined investment can ensure financial freedom.
  • It’s crucial to balance desires/wants with long-term investment for sustainable financial health.

Tools and Resources

  • Utilize budgeting tools and Excel sheets for tracking and adjusting financial plans.
  • Regularly review and adjust the plans based on lifestyle changes and financial goals.

Conclusion

  • Financial discipline and strategic investments are key to achieving long-term financial stability and freedom.
  • Simple starting budgets and consistent saving/investment can lead to substantial wealth over time.