Financial planning is an amazing profession because you seldom have a similar situation repeating. Each time I meet a new family there is something new, something unique and there are always unique challenges to address. To this extent it can be quite like astrology. Every person’s situation is quite unique. Just like the astrologer has a different destiny to predict for each person there is never a case where two persons or families have a similar solution despite having a similar situation.
Each person has his or her own unique style of planning and a unique perspective to managing money. Whether it is effective or not is not really the issue. The style and methodology is what is intriguing.
Once I met one Mr. Murli. There are two things that Mr. Murli always wants to do whenever he considered any financial decision having a cost value of above Rs 20,000. Here are the two conditions that must be fulfilled before he buys anything.
He would only spend if he had amount in cash. Now it does not matter if he is buying a car or house or diamonds or gold jewellery or TV or just about anything. He will only spend if he has the money to buy it in cash. This is quite normal as many people do not like loans so there is no big deal about this. But his second condition is something that most people would never imagine.
For Mr Murli, whatever he spends above Rs 20,000 should be for free or let’s say practically free over a period of time.
It is baffling to hear this at first. Some might say Murli is weird and how on earth will that happen?
Imagine you purchase a plasma TV for Rs 1 lakh and over time you get your money back. You buy a Rs 10 lakh Skoda and over time you get your money back. You buy a house for Rs 40 lakh and over time its free again.
Ok, here’s what Murli does to make this happen. Read this very carefully. He budgets for 10 per cent more of whatever he is going to buy. So if he and his wife plan to buy say gold and diamond jewellery worth Rs 80,000 he calculates that he would need to have Rs 88,000 first. Now he would go ahead and spend Rs 80,000 and almost simultaneous he invests the balance Rs 8,000. He expects to earn between 8 per cent to 15 per cent p.a. on this Rs 8,000 which is quite reasonable.
He will invest this money with a time horizon of minimum 20 to 30 years. He expects to recover full value of his expense i.e. Rs 80,000 plus his 10 per cent investment in approximately 20 years if he is able to make 12 per cent or more returns on his investments. Depending on market situation, if returns are better he recovers his expense value faster. In the worst-case scenario, if he is gets an average 8 per cent returns he will recover his expense plus his 10 per cent investment in about 30 years. A good part of this money will help him during his retirement years — that’s how he is partially planning his retirement.
His choice of products depends on the market conditions — if the rate of return on fixed instruments is high i.e. above 9 per cent he will invest there and when they are low, he will go for equity mutual funds. This is his style and method of financial planning.
Towards the end of each financial year he would invest the said surplus in lump sum for his financial goals and also complete his little bit of tax planning investment if necessary.
What a strategy! Whatever you spend you get it back in 20-30 years or even earlier. Sounds unreal but is quite logical and possible.
If you do not live to that point of time, you simply leave it as inheritance to your children. Over time, if you feel your children don’t need that inheritance you spend whatever has accrued and do what you like whenever you like. Take a three month holiday hopping around the world if you please.
You could fulfil shortfall in any financial goal in future. You can use the accrued money now or during retirement. It is all extra money anyways.
Like I mentioned earlier, I am not commenting on what Mr. Murli does is right or wrong or how effective his method is or the impact of inflation, etc. Each person has his own style which I respect. It is the approach and philosophy that is intriguing.
—Author is Director – Transcend Consultingkartik@trancend-india.com