How to beat inflation?

While doing financial planning for retirement or for your child's future or any other long term financial planning  you will have to consider inflation. And if you don't consider inflation while doing the financial planning, you will surely fail.

inflation.eu

The inflation rate is based upon the consumer price index (CPI). The average inflation of India in 2011 is 8.88 %. Now if you consider bank's saving account which provides 8% annual return. According to above data you are in loss of 0.88%.

If we consider the overall 7% average annual inflation rate lets see what will happen 20 years down the line.

• Say for example, today the MBA educational expenses are around Rs.5 lakhs in 2011 but after 20 years from now in 2031 the same expenses will be Rs.20 Lakhs
• Today in 2011 suppose if you need Rs.1 Crore to retire peacefully in India than you will need almost Rs.4 Crores in 2031 to retire peacefully with the same level of lifestyle.
• Suppose today in 2011 you need Rs.10 lakhs for the marriage of your daughter than in 2031 you will need Rs.40 lakhs to do the same level of marriage.

Equity is the only tool which can beat inflation in long run. 

Those days have become history when people used to build wealth with products such as PPF, Bank FDs and Government Bonds. Equity is the must have asset class in anyone’s portfolio to build wealth in today’s world. Equity can beat the two biggest wealth killers (Inflation and TAX) in the long run and provide highest returns than any other traditional asset class in the world.

Equity mutual funds are so much convenient and professionally managed and cheap that they can build enormous wealth for you in the long run that you can fulfill all of your financial goals.

Financial Planning for Child's Future

Financial planning for your child's future is not different than financial planning for your retirement.


Below are the few major expenses that will occur for your child's better future.

• Higher Education
• Abroad Education
• Marriage
• Start-up Business Expenses
• Second Home
• etc.

First of all calculate and decide that how much you will need for each and every expense? You have to pre-plan for your child’s higher education. You cannot build enough wealth for your child’s education in just 1-2 years.

The best time to start financial planning for your child is the day when he/she is born. If you have not started yet start it now.

As far as possible try to avoid education loan for your children as eventually you or your children have to repay it along with interests. It will be bad for your children to repay the loans in initial phase of their career because initial phase of career is ment for saving and not for spending.

Like retirement planning, here also you will have to consider inflation. Today in 2011 if MBA degree cost 5-10 lakhs in 2031 it will cost around 20-30 lakhs.

You may ask now where do I invest for my child's future? I have seen many ads in television about children's plan do i invest in that? One of the ad i saw where a mother ask dad for Rs.10 lakh for bunty's college fees. And the punch line is "Taki baccho ke collge fees aap ko zhatka na de". Beware of such attractive ads. Child future plans and other insurance cum investment products offered by insurance companies are worst.



You may require almost a decade to build wealth for your child’s future. So pre-plan it. Equity mutual funds are the best financial products to build wealth for your child's future.

Retirement and Inflation

Before starting financial planning for retirement, you should calculate that how much you will need after your retirement? In which year you want to retire? 

After retirement you will have your own expenses like travels, medicals, other day to day expenses etc. Do the total of these expenses. So now, you need to build a capital that can generate this much of income every year post-tax. Say for example, if we consider 8% annual returns from fixed deposit and your annual expenses are Rs.8 lakh after your retirement, then you will have to build Rs.1 crore of capital to retire peacefully.

Consider INFLATION while counting your financial goals for Retirement. 

For example if you are planning to retire in 2015 then Rs. 1 Crore may be enough, but If you are planning to retire in 2030 then Rs.1 Crore may not be sufficient as inflation will decline the purchasing power for money further.

The average inflation of India in 2011: 8.88 %

As you all know routine retirement age is 60, But it totally depend upon your decision when do u want to retire. After retirement as you will have a lot of free time, you can turn your hobbies into profession like becoming a consultant, community services, Small businesses, blogging etc. If you don’t mind working after retirement, then u can go for it and enjoy extra income with your hobbies in your happy retirement days.

In your active earning years, when you have cash flowing into your bank account you should seriously consider topping up your pension savings. Consider INFLATION, set a clear target and try to achieve it.


Equity mutual funds are the best financial products to build ample wealth for your retirement.

Where do I invest my money?

This question may arise in your mind - where do i invest my hard earn money? Before starting a effective financial planning you have to understand which product is good and which product is bad. To become financially free one do not have to invest in all the products available in the market. Truth is combination of only few products in proper proportion deponding upon your risk ability and your financial goal  can make you financially free. Risk ability depends upon in which age group you fall. For example a young investor can invest 80-100% in equity where as investor of age 50s cannot invest that much in equity.

Financial Products available in India

• Stocks
• Bonds
• Fixed deposits
• Saving account
• Gold
• Mutual funds
• IPO
• Real estate
• Term Life insurance
• ULIPs
• Whole insurance plans
• Money back insurance plans
• Pension plans / retirement plans
• Health insurance (Mediclaim)
• Auto / Home insurance
• Post-office savings scheme
• National saving certificate
• PPF (Public Provident Fund)
• EPF (Employer Provident Fund)
• Home / Auto loans
• Gold loans
• Personal loans
• Credit Cards
• etc.....

And many other products are introduced every year, You don't have to invest in all products. NOT the all the Financial products can help you to achieve Financial Freedom. Before you start investing in a particular product do some homework's like read reviews on net, ask experts on various financial forums etc.

Combination of only 3 financial products can help you to achieve your financial goals - Term Insurance, Mutual Funds & PPF.

• Term insurance gives you enough life cover with low premium.
• Mutual fund helps you to grow your money and beat inflation.
• PPF is the best product in India for TAX saving.

Emergency Fund

Why You Need an Emergency Fund?


Our life is uncertain, we even do not know, what will happen while crossing the road. You should expect the unexpected, and this is why you need an emergency fund.

Financial emergencies can come in any form like job loss, medical expenses, home or auto repairs or something you’ve never dreamed of. The last thing you want to do is forced to rely on credit cards or a loan which could simply compound the problem. So Emergency Fund is a must.

How Big Should Your Emergency Fund Be?


Emergency fund could be 3-6 months of you are monthly expenses sometimes 1 year of monthly expenses.

The emergency fund will protect your long term investments like investments in mutual funds and equity to get liquidated during the time of financial emergency. Most of the people don’t keep emergency fund with them and that’s why they have to liquidate their long term investments during the time of emergency.

Where to Keep Your Emergency Fund?


It is important to keep this emergency fund in a place that will fairly liquid so that you can get to the money quickly in the event of an emergency. Remember emergency fund is not for investment however if you still want to invest, keep it in such a place where you can liquidate as require and where there is no risk at all for example Saving Account.

• Your credit card is not the emergency fund.
• Your wife's birthday is not the emergency.
• Emergency fund is mainly for the financial emergencies like medical emergency.
• Emergency fund is not for investing or playing in stock market.

Snowball Method by Dave Ramsey

Get Out of Debt with the Debt Snowball Plan

The famous American financial author Dave Ramsey has suggested Debt Snow Ball method to Get out of Debt. We can also apply the same principles in India also.


The math seems to lean more toward paying the highest interest debts first, but According to Dave Ramsey personal finance is 20% head knowledge and 80% behavior.You need some quick wins in order to stay pumped enough to get out of debt completely. When you start knocking off the easier debts, you will start to see results and you will start to win in debt reduction.


Myth: I should pay off the debt with the highest interest rate first to get out of debt quickly.
Truth: You should pay off the smallest debt first to create the greatest momentum in your debt snowball.


daveramsey.com

Debt Snowball Plan
The principle is to stop everything except minimum payments and focus on one thing at a time. Otherwise, nothing gets accomplished because all your effort is diluted. First accumulate $1,000 cash as an emergency fund. Then begin intensely getting rid of all debt (except the house) using my debt snowball plan. List your debts in order with the smallest payoff or balance first. Do not be concerned with interest rates or terms unless two debts have similar payoffs, then list the higher interest rate debt first.

Paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan. Keep stepping up to the next larger bill.

Snowball Method by Dave Ramsey

Get Out of Debt with the Debt Snowball Plan

The famous American financial author Dave Ramsey has suggested Debt Snow Ball method to Get out of Debt. We can also apply the same principles in India also.


The math seems to lean more toward paying the highest interest debts first, but According to Dave Ramsey personal finance is 20% head knowledge and 80% behavior.You need some quick wins in order to stay pumped enough to get out of debt completely. When you start knocking off the easier debts, you will start to see results and you will start to win in debt reduction.


Myth: I should pay off the debt with the highest interest rate first to get out of debt quickly.
Truth: You should pay off the smallest debt first to create the greatest momentum in your debt snowball.


daveramsey.com

Debt Snowball Plan
The principle is to stop everything except minimum payments and focus on one thing at a time. Otherwise, nothing gets accomplished because all your effort is diluted. First accumulate $1,000 cash as an emergency fund. Then begin intensely getting rid of all debt (except the house) using my debt snowball plan. List your debts in order with the smallest payoff or balance first. Do not be concerned with interest rates or terms unless two debts have similar payoffs, then list the higher interest rate debt first.

Paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan. Keep stepping up to the next larger bill.