In my tenure as a financial planner, no situation ever seems to repeat itself. For every family there are fresh challenges to address. And every person has his or her own style of planning and a different perspective to managing money. Whether it is effective or not, isn't really the issue. The style and methodology is what's intriguing.
Take the case of Mr Murli. There are two things that he always wants to do when considering financial decisions of Rs 20,000 and above:
He only spends if he has the full cash amount with him, i.e. he does not like loans. He has never taken a loan and will never take one in his life. He only spends if he has the money to buy it in one single stroke. Of course, there are many people like Mr Murli.
But his second condition is what takes most people by surprise.
Murli believes that when he spends above Rs 20,000, he should get it for free! This means he spends in a manner by which whatever he buys becomes free or let's say, almost free, albeit over a period of time.
You must be thinking -- how on earth is this possible? Is Murli weird? You would want proof of how this can happen, and may also like everything you buy to become free over time.
Imagine purchasing a plasma TV for Rs 1 lakh and over time it becomes free. Or a Rs 10 lakh Skoda and over time, it's free.
Okay, here's what Murli does to make this happen.
He budgets for 10% more of whatever he is going to buy. So if he and his wife plan to buy gold and diamond jewellery worth Rs 80,000, he calculates that he would need to have Rs 88,000 first.
After that he goes ahead and spends what is required, i.e. Rs 80,000. The second and almost simultaneous thing he does is that he invests the balance Rs 8,000.
He expects to earn between 8% to 12% per annum on this Rs 8,000, which is quite modest. He invests this money with a time horizon of a minimum 20 to 30 years. He expects to recover full value of his expense, i.e. Rs 80,000 plus his 10% investment -- Rs 8,000 -- in approximately 20 years if he is able to make 12% or more returns on his investments.
He estimates that in the worst case scenario if he is able to average 8% returns he will recover the full value of his expenses plus his 10% investment, i.e. Rs 88,000 in about 30 years.
A good part of this money will help him during his retirement years -- that's how he is partially planning his retirement.
His choice of products depends on the market conditions. If the rate of return on fixed instruments is high, i.e. above 8-8.5% he invests there and when they are low, i.e. below 8% he goes for equity mutual funds. This is his style and method of financial planning.
Towards the end of each financial year from the surplus he has -- after all expenses and his specific expense related investments (as above) -- he invests the said surplus in one shot for his financial goals. He also completes his tax planning investment if necessary.
The above is possible and quite easy to do; needless to say you have to monitor your finances at regular intervals. If Murli is able to make 12% or more returns he can get his money back in about 20-23 years and if he makes 8% minimum he can get his full money back in about 30-32 years. If he manages his investments well, all this money can be tax-free as well.
What a strategy! Whatever you spend you get it back in 20-30 years. Sounds unreal, but it is logical and possible. If you don't live to that point of time in future you simply leave it as inheritance to your children.
Over time, if you feel your children don't need that inheritance you spend whatever has accrued and do what you like whenever you like -- for example, take a three-month holiday around the world if you please. You could fulfil shortfall in any financial goal in future. You can use the accrued money now or during retirement -- it is all extra money after all.
As I mentioned earlier -- I am not commenting on whether what Murli does is right or wrong, or how effective his method is or the impact of inflation, etc. Each person has his own style, which I respect. It is the approach and philosophy that is intriguing.
The author, an expert at Financial Planning, is a Certified Financial Planner and a Chartered Wealth Manager.
Disclaimer: The contents of the above articles are the intellectual property and copyright of the author, Kartik Jhaveri. No part may be used or reproduced in any form or manner. If you choose to act upon the information contained in the above article it is at your own risk. This article is purely educative and you are strongly advised to consult an expert prior to taking any significant decision.
