Financial Planning – Why do you need it?
Our parents and grand- parents didn't need financial planning. Why do we need it? This may be a common misconception among many.
Years ago, the lifestyle was very different compared to now. The world has changed tremendously and so has our lifestyle.
Let's see if you understand these changes and how it may affect you.
1. You are going to live longer
Life expectancy worldwide is increasing. Due to improvements in healthcare today, a baby boy born in 2004 is expected to have a life expectancy of 74 and a girl, 79 years or higher (depending on country)
2. More health care expenses
As you live longer, the total cost of medical care over your lifetime will also be more. Diseases that probably took the lives of many people are now treatable but expensive. You also need to plan for long term care after retirement.
3. Cost of living long
You will retire longer. If you and your spouse are 35 today, retire at 55 and live to 75, you're going to eat 43,800 meals (2 persons x 3 meals/day x 365 days/year x 20 years) in retirement. Excluding inflation, if each meal costs Rs. 15 today, you'll spend Rs. 13,14,000 (2 persons x Rs.15 per meal x 43,800 meals) on food alone. Considering inflation @8% pa. you will spend Rs. 70 lakhs on food alone during your retirement period.
4. You have more spending avenues
Not too long ago, there were limited or no theme parks, satellite television, home theatre systems, mobile phones, PDA's, play-station, private medical care, internet, shopping malls, designer clothes, special coffee shops, tolls, etc. to drain our income.
5. You travel a lot more.
You spend more on travel than you used to for common activities like work, shopping and schooling. It is very common to travel 30 kilometres or more in a single day. With increases in fuel price, your budget for travel will shoot up.
6. Late marriages
Time taken for building up career and establishing oneself are one of the main reasons for late marriages. Nowadays, it is very common to see retirees with children still studying. You have to build an education fund to cater after you no longer earn an income.
7. Costs of raising children is higher
Cost of raising children will rise. Children clothes, food and medical care cost more than adults.
You also pay for music classes, ballet class, children camp, language development, tuition, and more.
8. Your children will pursue higher studies
15 to 20 years ago, a diploma was sufficient to get a good start. Today many continue on for their MBA, PhD, other Masters degree. Instead of starting work at 22 or 24, you will have to pay for food, lodging, travel and study fees for a longer period till they kick start their career.
Inflation raises the cost of products and services. You may outlive your money, if your investments do not grow at least at par with it.
10. Estate planning
It is increasingly becoming difficult to pass wealth to the next generation because it is likely that you will outlive your assets and have nothing to leave to your children. In many cases, the transfer of wealth is going backwards.
It is for all these reasons that you need to have a financial plan.
The earlier you start, the easier and better it is.