First step towards secure financial future

In today's time of increasing disposable incomes and a 'rat race' to move ahead of others, a large number of people focus on earning more and spending even more. What they don't do is plan their finances keeping future requirements in mind. With increasing cost of living, the amount needed to sail through rest of the life, post-retirement, will be much higher in the times to come, than it was a decade back. The answer is financial planning. Let us address some of the critical issues which would help a person plan his/ her finances in a better way.

CONSUMPTION ASSETS

As incomes increase, one tends to consume more – better air conditioners, bigger refrigerators, bigger house and car, holidays in exotic locations, weekend dinners at five stars, so on and so forth. While increase in consumption with increase in income is perfectly normal, what is not correct is not doing it in a methodical way and not creating conservation assets alongside. There are two basic steps that are required. One is to plan in advance and second is to divert savings towards investments. Almost all consumption assets would lose their value year on year. For example, a car would lose 20 per cent of its value in the first year itself. Suppose, you want to buy a bigger car after three years from now, calculate how much you would require to buy a car of your choice and then starting investing towards that goal. Right way is to invest and work towards creating enough corpus to buy a consumption asset because of the depreciation factor. "Consumption, ie depreciating assets, must pay for themselves because over time they will have little or no value. Such methods of buying depreciating assets are part of prudent financial planning," suggests Kartik Jhaveri, a Mumbai-based financial planner.

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