Defining the problem
How you fair in personal finance is dependent on 3 things
– Your ability to comprehend numbers
– Your risk appetite
– And something that is not talked about often- common sense
Risk-taking is based on your existing knowledge and how you continue to broaden it. Reading, learning, and understanding more will provide you with greater insight into taking risks. How much of a risk you take can be the deciding factor between success and failure financially. As we progress through this module, we’ll cover this further.
Common sense has a place in all areas of life and not just finance, which is all we need to know.
Taking these three points of focus into account, let us now embark on our journey to discovering the extensive elements that form personal finance. Hopefully, this will give us a better understanding of the critical components necessary for success.
It can be assumed that most of you are in various stages of your careers. Some may be about to embark on their working lives, a few may have already been employed for a number of years, and some may be at the midpoint of their career paths.
No matter where you are in life, a common desire is to retire with happiness and contentment. Now that you have retired, it doesn’t mean that you can’t continue living the lifestyle you dream of. Stay determined to live in the way that feels right to you.
If the above is true, it implies that your disposable income will be the same as when you were working. A decreased disposable income could mean an unsatisfactory lifestyle post-retirement, something we would all rather avoid.
Let’s put this into perspective:
By imagining that you will work for the upcoming 25 years and retire afterwards, accept that you will need an amount of Rs.50,000 every month – post taxes, fixed fees and other expenditures – to sustain your desired lifestyle during the 20 extra years of your life.
The plan is that after 25 years, for the next two decades of your post-retirement life, you’ll need to set aside Rs.50,000/- per month, which amounts to Rs.600,000/- annually.
Although your opinion on what you need after retirement may not be the same as mine, I would still like to ask you to consider my idea.
I am going to present the data in a table form so that you can comprehend it better.
It’s clear this is an issue we must all face, and it is deserving of our attention.
This situation can be broken down into two components; thinking about it further reveals the scope of this problem.
– What sum should one have built up by the start of 2044, when retirement begins?
– What is the most effective way to gather the necessary funds?
Here’s what some of you might answer:
If we consider Rs. 6 lakhs per year, then it would be Rs. 1.2 Cr for 20 years (600,000 * 20). It translates to Rs. 50,000 per month. Basically, if we accumulate Rs. 1.2Cr by the year 2044, we can have a comfortable retirement till 2063.
If only life were that simple!
Given the above, the question to ask is, how much money must be saved in cash reserves by 2044 such that it can provide Rs.50,000/- each month until 2064?
In the following chapter, we will assess the required corpus bit and calculate the amount needed at the start of the retirement year. In the subsequent section, we will determine the means by which this corpus is amassed.