You might have wondered that there are so many investment options, each offering a different rate of return; then what is the right rate of return for you. There is also a lot of information about conservative investors, moderate investors and aggressive investors, adding to the confusion.
Where do I Start?
Before starting to calculate the right rate of return for yourself, determine where you stand today. These are the factors you need to consider:
Current Assets:
The starting point for any long term investment exercise is an assessment of your current financial situation. You can either make a list online or offline. Make a comprehensive list of the real estate, gold, jewelry, fixed deposits, shares, bank accounts relating to you (as well as your spouse if you are married).
Current Liabilities:
Along with your assets, you will also have certain liabilities. These would be your monthly family expenses as well as any outflows towards EMIs (equated monthly installments) and any other liabilities in terms of loans taken by your parents which need to be repaid.
How do I Calculate the Right Rate of Return?
Once you have estimated your current financial position, the next step is to find out what your financial goals are. The financial goals that an individual has are normally a comfortable retired life, higher education and marriage of their children, a home as well as both domestic and foreign travel. This is not an exhaustive list and may differ from individual to individual.
Once you have decided on your financial goals, you need to find the future value of these goals. So what are future values of goals? Let us take an example, say retirement. If your monthly expenses are Rs. 25,000/- per month today, 30 years later they are going to be higher. The reason is inflation.
So you need to take the help of a financial planner to help you calculate the future value of your goals or use an online financial calculator.
Find out the difference between the future value of your current assets and the future value of your goals. The gap is what you need to cover through additional investments (through your savings).
The rate of return can be determined when you know the monthly investments, the duration of your goal (in how many years you need to achieve it) and the future value of your goal. This is the right rate of return for you.
Also Read: Blueprint Your Life: 5 Most Important Aspects of Financial Planning
What If My Investments are Not Enough?
If you feel your investments are not enough there are three options for you. One, start budgeting to find out where you can reduce expenses so that you can invest more.
Two, you have to invest in an asset class that is risky according to you.
Thirdly, you can step up your investments when you are able to save more as you grow in your career.
All these options are difficult but far better than not realizing your financial goals.
So find out the different investing options from debt to equity to see which asset class or mix of asset classes can help you achieve your goal.
You also need to ensure that your liabilities are covered by taking adequate term insurance.
Term insurance is pure insurance or low cost policy where there are no returns at maturity, but they are a low cost option to protect your family from unforeseen emergencies.
Does the Right Rate of Return Change?
Yes, when you are close to achieving your goal you need to shift from a risky asset class to a more stable asset class. Even post retirement, you need to invest a small portion of your investments in equity as that will provide inflation-beating returns.
Start Today and Enjoy the Life of your Dreams
Starting something new is always challenging, but with a little bit of discipline you can achieve a balanced life. You need to understand your financial position with the help of a professional financial planner so that you know which investments will provide the right rate of return.
Once that is determined, there will be greater clarity with regard to your financial goals in life. You will stop worrying unnecessarily and lead the life you want.
