Planning your finances is as important as earning. As you save and invest for heavy-ticket goals such as education, buying a house, retirement, etc., you can even plan for some of the more expensive discretionary expenses such as buying white goods and events of high personal importance such as marriage, anniversary or birthday celebrations, and graduation, among others. Of course, saving for any such spending comes only after you have fulfilled the immediate needs of adequate insurance and emergency funds or are well on the way. If there is any debt that you wish to retire, then that takes priority.
Often, we are aware of certain events but forget to plan for them in advance. There are many such instances--a relative’s or friend’s 25th wedding anniversary, someone’s graduation, a wedding in the family, a huge 50th birthday bash, or even replacing white goods such as washing machines, refrigerators, dishwashers, and many others. Rarely do we plan for these in advance, even though we know that such a need will arise.
Here are some things to keep in mind when it comes to lifestyle and discretionary financial goals:
Follow goal-based saving: Think of what you are saving for, how much you want to save, and how much time you have. For example, your grandmother’s 70th birthday may be two years away, and you may want to get her a special gift. You can think of what you want to give her, see what it costs, and then plan backwards to see how much you need to save. Not just others, you may want something for yourself. It is always wise to plan beforehand for any major life goal. Couples should talk about how they are going to manage their finances. "The financial implications of major life events should be considered and planned for," says Chenthil Iyer, founder and chief strategist of Horus Financial Consultants.
Beef up the savings: To be able to pay for these lifestyle expenses, you will need to increase your savings. Whenever you receive any extra money—it may be from a gig, a bonus, a tax refund, or a gift—you can save at least a part of it. Instead, avoid the temptation to spend it and instead save it for bigger expenses.
Keep increasing costs in mind: Items such as white goods have a limited lifespan and need to be replaced periodically. In addition to that, inflation will mean that a similar item will cost more even two years down the line than it does today. In addition to that, due to an increase in commodity prices, the final cost of white goods can also increase. There are many financing options available for consumer durables. They are usually for items that cost Rs 10,000 to Rs 15 lakh. But, if you do not want to avail of a loan, you can plan in advance and save up.
Investing in equity: For near-term lifestyle expenses, saving is usually a better option than investing. Investing in purely equity products when you need money in the near term is not recommended. Investing in debt products has its own risks too. Your rate of return on investment is vulnerable to inflationary risk, taxation, re-investment risk (in a falling interest rate scenario), and more. If you are only chasing a return on investment, you are exposed to risks such as liquidity, credit, duration, etc., "says Arijit Sen, a Sebi-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm.
For a goal that is around five years or more away, a risk-compatible person could invest in equity for long-term appreciation but be fully aware of the risks involved. However, for goals that are one or two years away, instruments such as fixed deposits that give guaranteed returns are preferable. "Some investors are eager to take considerable equity exposure even for goals having just a 3-5 year horizon. One must see both sides of the coin. "The risk-reward scenario may turn out to be unfavourable," says Sen.
