How much money is enough?

Introduction

We have often heard, and rightly so, that money is not the most important thing in the world.

However, one cannot deny the fact that a lack of money can affect our lives considerably. The basic

objective of money is to help us survive and fulfill our needs, and without money, our personal and

professional lives can be negatively influenced. Once these needs are satisfied people need money

to satisfy their wants and then luxuries, which increases with more money in hand.

What are the factors that affect your need for money?

The money required by each individual or family is different for every individual and is

dependent on several factors. Some of these factors are as listed below:

● Standard of living – the degree of comfort available to a person or a community. People

with high standards of living generally need more money to be able to buy things that

are more luxurious as compared to people with lower standard of living need much

lesser, as they need to only meet their needs.

● Social Requirements – The kind of peer group you mingle with can largely determine the

amount of money you may need to live an unaffected life. Particularly in India, people

tend to spend substantial amounts on festivities and weddings in order to be able to

maintain and sometimes even show off a social status. The case in more developed

countries may be very different.

● Life Stage is also important in determination of money requirements. Someone closer to

retirement would need lesser to save and more to spend. On the contrary, a young

salaried adult would require much more to save.

● Family dynamics – If you have dependants, your money requirements would be

considerably more than a couple without kids, where both the individuals are working.

● Lifestyle inflation refers to an increase in the standard of living of an individual with an

increase in income. This leads to higher expenses as the income goes up. It tends to

continue each time when one gets a hike but perpetually is unable to meet the financial

goals in life.

● Appetite for Risk – Your ability to take risks could largely determine the level of money

you may require. If you are someone who enjoys taking on risky jobs or investments, the

chances are you lose money also easily. This would mean you need more disposable

money.

● Interest Rates – When the real interest rates (interest rate minus inflation) is high, one’s

requirement for more money is lower as passive income is higher. The vice-versa is true

when the real interest rates are low or even negative.

 

Other than the above, there would be several other factors that would ascertain how much

money is enough to a person to be able to lead a comfortable life.

Role of financial planning in deciding requirement of money

Financial Planning is the process of finding routes to save based on one’s earnings, savings and

expenses. Important in financial planning is to ascertain how and where one can save. This

depends primarily on how much money you may require and hence calculating the expense you

can undertake. By planning your finances, you manage your money such that you can reach

your life goals without any major hiccups.

Some of the reasons why Financial Planning is of importance, are:

✔It provides direction to your goals or dreams.

✔Financial planning makes you disciplined towards money.

✔You plan your budget in a more formal manner which is generally easier to follow.

Following points can help you plan your finances in a better manner

1. Set up your Financial Goals

Financial Goals are targets that you set for allocation of your savings. Your savings are allocated

based on your priorities which varies from person to person. It is also important to give

your financial goals a target time horizon.

Examples of financial goals include:

● Paying off all debt within 3 years

● Saving “X” amount for retirement by the age of 50

● Building an emergency fund

● Buying a home before 40

● A foreign vacation in 3 years

● Starting own business in 10 years

Think about what’s important to you as you begin to set goals.

As mentioned earlier, it is also important to categorize these goals into time frames.

This is important as it helps to invest funds in a suitable investment based on risk

appetite and liquidity preferences which may vary for different goals and different time

horizons. Any person may have multiple goals and it is completely okay to change one’s

goals with changing circumstances.

2. Allocate your Income wisely

There are various asset classes available to choose from. The asset class best suited for you

would depend on factors such as risk-taking ability, investor profile such as age, financial

 

goals, etc. For an understanding of what asset classes are and which one might be

suitable for you, you could view this video.

https://www.youtube.com/watch?v=5plQILf08hU&t=297s

3. Control your expenses

Most people focus on their income but fail to track and control their expenses. In order to

understand which habits one can change to save money, it is important to know where

money is going and how you are spending it. Once you are aware of your expenses you

would be better off at saving.

4. Monitor your Investments

Building a portfolio after creation of a plan can be a waste if one does not monitor his portfolio

periodically. Investments which have been made for meeting short-term goals should be

monitored at least once every 3 months. While, investments made to meet long-term

goals should be tracked at least annually. While some people display undue exuberance,

checking their portfolios on a regular basis – sometimes weekly or even more, it is

prudent to do it at longer intervals. In changing market conditions, an important thing to

analyse is the asset allocation, which could have changed and will need to be

rebalanced as per an investors risk profile.

5. Start Early

It is a sure shot formula to success. The earlier you begin, the better you are expected to

be financially. One of the biggest advantages of starting early is the power of

compounding. The interest that one earns on his investments, also start to participate in

future earnings. In other words, one starts earning interest on the accumulated interest.

Hence, the longer the savings period, the more time one gives to the interest income to

grow.

Let’s understand the power of compounding with the help of an example. Mr. Sharma

started investing Rs 5,000 every month from the age of 25. Then there is Mr. Verma,

who started investing Rs 10,000 per month when he reached the age of 35. Let’s assume

they earn a practical 12% per annum and see how their investments have done when

they turn 45. Mr. Sharma’s corpus turns to a sizeable Rs 50 lakhs, while Mr. Verma’s

investment value will be less than half at approximately Rs. 23.2 Lakhs.

So how much Money is Enough?

Most of us dream of having a better lifestyle than the one we have currently. We intuitively

know that we need money to fulfil our aspirations. But how much money is enough? Seems like

a difficult question? The answer is rather simple. The answer is based on what exactly money

means for you.

Some common answers could be financial security, something you can buy, comfortable

retirement, good education for your children, freedom, etc.

Recent research and scientific evidence point to the fact that once we reach a comfortable

lifestyle, when we don’t need to worry about our basic needs anymore, having more money

doesn’t bring additional happiness. Thus, money increases satisfaction to a certain extent but

declines marginally after a certain level. At this level we are chasing our wants but not needs.

The difference between "wants" and "needs" is fairly simple. "Wants" are those which define

the desires of an individual, whether they carry any value or not. On the other hand, "needs“

are those which you must have to survive or to do or achieve something of material.

To conclude, we need money to fulfil our goals which stem from our needs and wants. What

you prefer to have is subjective and you should strive to achieve that. Financial Planning will

play a key role to help you achieve success in this regard.

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