The paradigm of financial planning has changed a lot over time. In the past, the formula for financial health was simple: Income – Savings = Expenses. People focused on saving first because priorities in life made their financial goals clear. However, this approach has evolved. Today, many individuals follow the formula Income – Expenses = Savings, which means now many people spend first and save what’s left. This shift signifies a change in priorities, with spending taking precedence over saving.
In earlier times, financial planning was relatively clear and simple. People primarily invested in traditional avenues like gold, land, and fixed deposits (FDs) or simply saved the cash. These methods provided a sense of security and stability, as they were considered safe bets. However, as financial literacy has increased, so has the complexity of investment options.
Now, individuals are exploring smarter methods of investment that often involve taking calculated risks. The surge of investors in India’s capital markets highlights this trend. According to the Association of Mutual Funds in India (AMFI), the assets under management in the mutual fund industry have grown from ₹ 26.33 trillion as of October 31, 2019 to ₹67.26 trillion as of October 31, 2024, a more than 2-fold increase in a span of 5 years. This indicates the growing awareness of diversified investment options.
To manage the changes well, it’s essential to know what your financial goals are. This journey from saving to investing begins with being aware of what you want to achieve. Consider your objectives, such as buying a house, funding education, or saving for retirement. Understanding the value of these goals can provide a clearer picture of your financial journey.
For example, if you wish to purchase a car worth ₹14,00,000 in five years, you need to set a target for your savings and investments. If you earn around ₹1,50,000 per month and you aim to save ₹20,000 each month, you’ll need to explore investment avenues like SIP investments, etc. that can help you reach that goal faster.
As you consider different investment options, it’s essential to evaluate your risk tolerance. Taking risks can lead to higher returns, but it also means there is a chance of loss. The key is to find a balance that aligns with your financial goals and comfort level.
Depending upon your risk profile, there are a few investment avenues you can choose, like equity stocks, mutual funds, bonds, real estate, and the Public Provident Fund (PPF).
Once you have identified your financial goals and understood your risk tolerance, the next step is to prioritize these goals. Determine which goals are short-term and which are long term. Setting targets will help guide your investment decisions.
Let’s understand this concept with an equation: Savings(X) + 1 = Life Goals.
Your income is the money you earn, which is “X,” and your savings are the part of that money you keep aside. To reach your life goals, like buying something big or achieving financial security, just saving money might not be enough.
The “+1” in the equation represents something extra, like investing or smart financial planning that helps your savings grow faster to achieve life goals. This is important because growing your savings beyond what you earn can make it easier to achieve your goals. So, the idea is that savings need a boost to truly meet your future needs. In reality, achieving financial goals often requires careful budgeting, disciplined saving, and sometimes investing to grow your savings over time.
As financial planning continues to evolve, the focus is shifting toward smarter investments and informed decision-making. Individuals are becoming more aware of the importance of managing their finances and understanding the risks involved. While taking a safer route can be a comfortable choice, breaking the comfort zone and taking calculated risks can lead to greater rewards.
In the journey of financial planning, awareness and education play vital roles. Taking the advice of a financial planner and wealth manager can ease the process further. By setting clear goals, assessing risks, and choosing the right investment instruments, you can pave the way for a brighter financial future. Remember, starting early and being informed can make a significant difference in your financial journey.