The fundamentals of financial planning

You are richer than you think you are, and you have far more financial resources at your disposal than your bank account balance would suggest. The trick to unlocking those resources lies in understanding the relationship between money and time, and then having the discipline to abide by the rules that govern that relationship. This article will lay out those fundamental principles to help guide you in your process for developing a personal financial plan and unlocking the full potential of your money.

Here are five simple rules to live by.

Know what you are saving up for, and how much time you have to save for it

Strange as it may sound, most people cannot list the biggest expenses
they expect to have in their lives. SmartRupee assumes that there are five
key expenses that most people will need to save for. In order of
importance, they are: Personal retirement, emergency or short-term cash
needs, house, children’s education, and children’s wedding.
Not all of these
are expenses that are relevant to everyone’s life, and different people
may expect to pay for all or part of each of these expenses, even if they
are relevant (for instance, your spouse might pay for half of your
children’s expenses, etc.) The SmartRupee model allows each client to
customise the model to best suit their needs.
You should also try to specify
an amount that you plan to spend for each, and a date when you expect
to actually have to spend the money. For instance, for the house: when
do you want to be able to buy it? Ten years into your career, or 15
years? And do you really want to go after that 1,000-square-yard house
in DHA or are you better off with a three-bedroom apartment in a
reasonably safe neighbourhood? The SmartRupee model makes some
assumptions, but allows you to modify them according to your needs,
allowing you to see the consequences of the choices you make.
education: to send abroad or within Pakistan? If abroad, where? How
fast do educational expenses rise over time? And how much income
would you realistically want during your retirement? Do not assume that
your expenses will go down. They never do