FINANCIAL PLANNING: Budgeting is critical for achieving goals

Spending comes naturally to most of us, whereas investing requires an effort. Would the behavior be the same if we had a mirror that showed us our future image under each situation?

Budgeting is what ants do daily in anticipation of a rainy day. We all know that our inflows from salary, business income, professional income, etc, will dry up one day and our monthly cash flows may not be enough to fund our goals (like car or house purchase, going on a vacation, funding kid's higher education and marriage, building corpus for retirement, taking a sabbatical, starting an enterprise, etc).

We invest, so that we have enough funds as and when our goals come knocking. Also, to protect the purchasing power of our money and to ensure that it stays relevant in the future (to the same extent), we plan and invest our surpluses to build a corpus for our goals. Goals would include needs, responsibilities, dreams, whims, and fancies.

While planning for our goals, financial planners tag the existing assets towards meeting a future need. If existing assets fall short of future needs, we have no option but to nudge the client towards starting to invest for those unaddressed goals from today. In addition, people are increasingly living till 95 years or more, this means an earning life of 35 years (from the age of 25 to the age of 60) and living off the money accumulated in those 35 years to fund the next 35 years (from 60 to 95 years). This makes retirement one of the surest big goals and requires a monthly investment commitment to fund for it.

Starting with the amount needed for a certain goal in future, we work backward to compute the amount required to be invested in the interim years (at a certain rate depending on the asset class the money is being invested in). If the amount that ought to be invested is lower than the natural monthly surplus (which is most often the case), expenses need to be curtailed (read budgeted).

Budgeting brings discipline to the investing behavior and seeks to cut down on negative surprises in the future. For calculating the right amount to invest (and where and at what rate) it's best to seek professional advice. Professionals like financial planners will take a holistic view of all your goals, existing assets and liabilities, cash flows (both in and out), attitude towards risk, and then urge you towards investments on a frequent basis. Eighty percent of a financial planner's job requires managing a client's behavior. We have often seen people hire a yoga teacher or a gym trainer so that they can successfully execute their fitness regime. They may know what needs to be done, but the last mile push required towards actually doing that may be missing.

For budgeting to happen seamlessly, the monthly outflows need to be listed (both critical ones and avoidable ones), the monthly investment needed to meet your future needs must be computed (after pegging currently held assets to future goals and then calculating for unaddressed goals). An attempt to bridge the gap between the amount needed to be invested and the natural surplus ensures belt-tightening or budgeting.

This Swedish proverb sums up the need for reining in our expenses (and therefore budgeting) beautifully. It says, "He who buys what he does not need, steals from himself."

Warren Buffet's wisdom also pours in on similar lines, he says, "If you buy things you don't need, soon will have to sell things you need"

The writer is founder of Srujan Financial Advisers LLP and author of 'Why greed is great'