Make Financial Models Work for You

Invest in Yourself, Invest Wisely

Author

Shailja
January 17, 2024

Financial models aren't just for analysts and economists—they are powerful tools that can guide your personal financial decisions, helping you navigate the complexities of investments and budgeting. Welcome to ThriftyOwl.Club, where we explore financial mindsets and hacks, helping you enhance your financial acumen one hoot at a time!

Ever feel overwhelmed by financial choices? Should you put that bonus in a fixed deposit or take a chance on the stock market? Should you prepay your home loan or invest in your child's education? Worry not, dear reader, for the answer lies in a powerful tool: financial models!

These are not just complex spreadsheets reserved for Wall Street giants. They're practical frameworks, akin to mental maps, that help you navigate your financial journey with clarity. Today, we'll unpack three simple models that can empower your everyday decisions in India's dynamic economy.

  1. Budgeting with the 50/30/20 Rule: Imagine a pie chart dividing your income. Allocate 50% to needs (rent, groceries, utilities), 30% to wants (travel, entertainment, dining), and 20% to savings and debt repayment. This ensures your basic needs are met, you enjoy life's pleasures and prioritize financial security. For instance: Earning ₹50,000 monthly, your needs might be ₹25,000, wants ₹15,000, and savings/debt ₹10,000. Adjust these segments based on your specific situation. Track your expenses for a month to see where your money goes.

  2. Goal-Based Investing with SIPs: Planning for a dream vacation in two years? A child's higher education in 15 years? SIPs (Systematic Investment Plans) in mutual funds become your allies. Choose funds aligned with your risk appetite and time horizon. Visualize the power of compounding through an online calculator. See how small, consistent investments today can grow into substantial wealth over time. Start small, say ₹1,000 per month, and watch your money grow steadily through the power of compounding. 

    Let's look at it this way: Aiming for a ₹5 lakh vacation in two years? A moderate-risk hybrid fund might be suitable. Investing ₹1,000 per month for 24 months, with an assumed 10% annual return, could get you close to your target. Remember, past performance is not indicative of future results, so consult a financial advisor for personalized guidance.

  3. Power of Early Repayment: Mortgages can feel like chains, but what if you could break free sooner? Consider the snowball effect. For instance, if you have a 20-year home loan of ₹50 lakh with a 9% interest rate, an additional ₹1,000 per month can shave off over 4 years and save you significant interest. For example, use online EMI calculators to compare different scenarios. Play around with the extra payment amount and see how it impacts your loan tenure and total interest paid. Remember, consult your lender for prepayment charges before diving in.

  4. The Diversification Garden: Imagine planting all your crops in one monsoon-prone field. Risky, right? Diversification is your financial garden, spreading your investments across different asset classes like stocks, bonds, and real estate. This minimizes the impact of market fluctuations, ensuring your financial harvest remains bountiful. Interactive Example: Invest 50% in equities, 30% in debt, and 20% in gold. This spread minimizes risk while maximizing potential returns, just like a diverse, well-tended garden!

  5. The Emergency Fund Umbrella: Remember those sudden Mumbai monsoons? An emergency fund is your financial umbrella, sheltering you from life's downpours. Aim for 3-6 months of living expenses readily available. This might mean delaying that fancy phone, but the peace of mind during unforeseen medical bills or job losses is priceless.

  6. The Risk-Reward See-Saw: Every investment carries risk, a trade-off for potential returns. High-risk ventures like cryptocurrency could offer sky-high rewards, but be prepared for a stomach-churning plunge. Stable government bonds might offer lower returns, but they're the sturdy rock in your financial storm. The see-saw model helps you balance these choices. Interactive Example: Allocate 70% of your investments towards low-risk options like PPFs, ensuring stability. Then, use 30% for a calculated high-risk venture like small-cap stocks. This personalized blend keeps your financial see-saw balanced.

Empowering Your Financial Future:

Financial models are not just spreadsheets; they're your financial compass, guiding you toward a secure and prosperous future. Don't be intimidated by the jargon or perceived complexity. Start small, experiment, and witness the power of financial modelling in action.

Take Action Today:

  • Download a free financial modelling template online or use readily available apps.

  • Attend workshops or online tutorials to learn the basics of financial modelling.

  • Seek guidance from a financial advisor to personalize your models for your specific situation

Start building your financial models today! Remember, small, consistent steps with the right tools can lead to big financial wins. Take charge of your money, one model at a time.

Ready to take control of your financial future?