Chapter 3: Strategy or How the heck do I get to Financial Freedom?

3.5 By making sure the Plan can work successfully despite shit happening


Has your plan taken into account things going wrong in the future? Is it shock-proof? How do you make it shock-proof? What is the rationale behind the planning that should give you the confidence it is? What is the role of different asset classes in your plan? Finally, what is the One Thing that you can do to make your plan a success?
 
When you are planning for the future it’s really stupid to believe that shit won’t happen. A plan that works only under near ideal conditions is more hope than a plan. At the same time, if you want a plan that handle anything and everything that can potentially go wrong shows that you are a hypochondriac who should be institutionalized. But jokes apart, a good plan must ensure success and enable you to make changes to it when unbelievable shit happens. 
 
So let check out how the plan that you made on Moneyworkls4me or elsewhere measures on this. In all financial planning there are some assumptions of expenses and returns. And the first thing is that you can make changes to many of these and get a revised plan. But for that you need to understand the rationale behind the plan. I am sure this will reassure you that you actually have an amazing Plan and Planning Tool. If you are using a different tool or service you need to check it against what you learn here.
 
Let’s check the default setting on the Financial Plan done @ moneyworks4me. 
 
The long-term inflation rate is taken as 5%. The basis for this is that the RBI whose main job is to keep inflation under control works to keep it between 4 to 6%. When inflation starts showing signs of exceeding 6% it starts taking action. Its preferred number is 4%. Any government if it has to remain in power for long in India can’t afford high inflation simply because it can lead to being voted out of power. There are many structural changes that have taken place and are being worked upon that make it possible for India to grow at 7%+ while keeping inflation within limits. 
 
It is important that other assumptions are aligned to the inflation rate assumption. The default setting on the returns from Debt is same as the inflation rate and from equity it is set at 12% which essentially 7% growth in real GDP plus 5% inflation and we can expect investing in good quality equity to deliver this long term with a high probability. The returns estimates are also realistic and aligned to the inflation rate estimate. If the inflation rate is higher than 5% you are likely to earn more than the 5% returns set for Debt. Also, you could invest to earn more than 12% returns on equity in this case. 
 
When it comes allocating investment to Debt and Equity the plan does so depending on how long you have to invest before...........Read More

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