The below article is an excerpt from Satish's book 5 tales … 6 perspectives. To know more about Satish and read all the stories from the book click here.
Ask any citizen of Mumbai the above question and you will get a prompt answer. Local trains bring life to the city of Mumbai. The city gets paralysed if local trains stop.
I boarded a semi fast local train on a Monday morning and was heading towards my office. I had a meeting at 11 am with Mr. Shailesh at our Mumbai office. On my way to office I was mentally preparing myself for the meeting…a customary thing which I do before a meeting.
Mr. Shailesh, 30, a chemical engineer, works in a pharmaceutical firm in Mumbai. When I last spoke to him over the phone, he was keen to know how financial planning will help him in managing his finances. He had heard about financial planning from his friends and newspaper articles.
At 10:50 am Shailesh stepped in our office, he sat in the lounge for 5 minutes and then had a cup of tea with some biscuits. At 11:10 am we sat together for a discussion. After understanding his monthly cash flows and his till date investments, I asked him a question, “In which local train do you travel”?
Shailesh got surprised! And asked…”why suddenly in the middle of the discussion you want to know which local train I travel”?
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I smiled at him and requested him to answer the question. Shailesh promptly replied…Fast train! “Why don’t you travel in a slow or semi fast trains”?…I questioned him back. For a moment, Shailesh got a little perturbed and then replied; look if I travel in slow or semi fast trains then I reach late to office.
I further asked him, “How much time does it take to reach office if you board a fast local train”? Shailesh got querulous and retorted, it takes me about 1½ hours to reach office if I take a fast train. By now Shailesh had run out of patience and told me I came here to discuss with you about my investments and not my daily itinerary schedule. For god sake can we get back to my investments and financial planning…? Look I need to rush to office.
Oh definitely…you see there is strong similarity between local trains and financial planning I said with a smile. Shailesh got amused and asked me how on earth would there be a linkage between financial planning and local trains? I told him to listen carefully on what I am about to speak, to understand the analogy between financial planning and local trains.
I continued…When you leave your house and reach the railway station you know you have to board 8.20 am fast local train to reach your office by 10 am – which is your final destination. Shailesh nodded his head in agreement…
I continued…now let me draw a table to evince the similarity between local trains and financial planning.
|
Left Column |
Right Column |
|
Fast Train |
Investment in Product ‘x’ |
|
Semi Fast Trains |
Investment in Product ‘y’ |
|
Slow Train |
Investment in Product ‘z’ |
|
Time to reach office |
Duration of financial goal |
|
Destination – Your office |
Destination – Financial Goal |
|
Speed of train |
Rate of return on an instrument |
Now Shailesh refer the left column & right column simultaneously and answer my questions;
When you board a fast / semi fast / slow train you know the destination of where you wish to get down, but when you invest in product ‘x’ or ‘y’ or ‘z’ do you know which financial goal will get accomplished? In other words you have made investments in fixed deposits, mutual funds, insurance policies, real estate…which of the above investments will help in meeting your child’s education goal, their marriage and your retirement goal?
When you board a train you know the time it will take to reach your desired destination. When you invest in a financial product, till what time should you stay invested…1 year, 5 years or 6 months? What is the tenure of the financial product? Does it match with the duration of financial goal?
Similarly, the speed of the train, you know a fast train will cover ‘x’ distance in ‘y’ time (Speed = Distance / Time) Do you know what rate of return your investment products earn or are expected to earn? Will this return be sufficient? Will you be able to accomplish your financial goals in the requisite time?
Financial planning is a comprehensive exercise carried out to seek answers to below questions.
1. Know the desired destination (Define your financial goal)
2. Know the time to reach the destination (Find out the duration of financial goal)
3. Know the speed of the train (Find out the rate of return required to meet your financial goal)
4. Lastly, board the right train (Choose the right investment product)
Now tell me Shailesh do you understand the linkage between financial planning and local trains. “Oh yes, now I able to comprehend the similarity”…said Shailesh
Shailesh continued…this means if I board a wrong train I would never reach my destination… in other words if I invest in wrong product I would never meet my financial goal. You are absolutely right…I exclaimed!
Shailesh understood the linkage between financial planning and local trains. Have you understood it?
If yes, then board the right train to accomplish your financial goals.