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. Children’s 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.


Your money needs to be beat inflation

Leaving your money in your bank account – even if it is a savings account – does not count as investing. Neither does putting your money into a committee. The rate of return on these two investments is 0%, and every year, your money loses value due to inflation. So, in inflation-adjusted terms, for an average inflation of 7.6% per year in Pakistan, an asset that has a 0% return really has a negative 7.6% return. Therefore any investment and its returns should beat inflation as much as possible. To attain this ideal position, one should look at long-term return averages while evaluating assets to invest in.


Invest early

Do not think that you can start investing later. The earlier you start, the more time you give your money to compound itself. There can be a huge difference in the amount a person can save up depending on when they start. Investing early, in other words, matters a lot. But do not panic if you are older and have not saved early. You can still catch up, but just be aware that the older you start, the more money you need to start putting away to achieve the same retirement income.


Invest often

While the averages are good to know, it is also important to realise that the markets can be quite volatile and at any given moment in time, your investment may be profitable or in a loss-making position. The important thing is to not sell in a panic, nor to start buying too much when the market is rising fast. Investment plans need to be systematic, and the best plan is to simply put away a certain amount of money every month towards each of your savings goals. Do not try to time the market, especially in the hunt for unreasonably high returns. To chase unreasonably high returns is, in market parlance, to be a pig. And there is an old market adage about pigs: “Bulls make money, bears make money, but pigs only get slaughtered.”


Automate your savings

The only consistent way to save money is to have it be automated payments. This is one thing SmartRupee offers: we help you decide how much you can save every month and set up automatic investments every month or quarter. The conventional wisdom in Pakistan is that to save, one needs to control their spending. We reverse that logic: we help you figure out how much you need to save, automatically deduct that from your bank account every month or quarter, and you can then spend the rest of your income on whatever you want. There is, of course, more to investing than these basics, but those are the parts of investing that we handle on your behalf. Following these rules, and having the discipline to stick to your plan, is likely to result in significant wealth accumulation over time.