Imagine this – you got your first salary. You end up spending the money for buying gifts for friends and family, managing your day-to-day expenses. Is all your subsequent salary being spent the same way? Then you might run into trouble when you actually need money like an emergency. Ideally way should be to spend what you have after saving.
Before that, you should know what are the basic financial concepts that impact your money.
- Compounding and time: Just like a tree that grows over time, your money also has the potential to grow provided you plant it in the right place and nurture it well. The small amount of money can surprisingly grow to a large amount by the time you actually need it; thanks to power of compounding. Even if the money you have is small, it is better to start early to reap the benefit period of investment.
- Inflation: Where compounding helps, Inflation doesn’t. Things become expensive over time due to many reasons. This rise in prices of essential commodities is called inflation. E.g you may not able to buy something at the same price which you paid a few years ago. Now, how fast your money grows, in relation to inflation is what determines how your wealth grows. An investment returning 8% when inflation is 8% is doing nothing but keeping your money where it was. Your investments need to be put to work where it could actually give inflation returns so that you could achieve your dream of owning something at a future date. If you dream of a car worth Rs. 50 lakhs today and you save money by starting a recurring deposit to collect 50 lakhs in 10 years’ time to buy it, the price of the car will be much more than what it was 10 years ago. What comes to help is an investment in mutual funds through SIP.
- Risk: Nearly every investment comes with risk, but it’s worth taking to ensure you beat inflation. A bank deposit is generally considered the safest whereas shares of a company are considered risky.
Generally, the younger you are, the greater will be your ability to take the risk. Stocks and mutual funds give good returns but do come with some risks although the risk is very low for long-term investments.
Just starting an SIP for some X amount will not help you reach your goal as goals differ with individuals and so will the amount of SIP. So for that you should have a proper financial planning. Now let’s discuss what are the basics of financial planning?
- List your assets and liabilities: List what you own versus what you owe. The difference is your net positive or negative financial worth. This will give you an idea of your financial status at the moment.
- Your income is your revenue: Your salary or profits is what you make and where your savings will come from.
- List your expenses: List all your expenses for the month. This will tell you where you are spending your money and where you can cut costs.
- 4. Create an emergency fund: Experts believe that you should create an emergency fund that has 3-6 months of expenses. This will help you deal with possible layoffs or unforeseen emergencies. An emergency fund should be your first goal. After this, list down your goals under long term, short term, and medium term heads.
- 5. If you have dependents, get insured: If you have any dependents, it is a good idea to get insured for a sum that is 20-30 times your annual earnings. Insurance is an expense and not an investment. I recommend buying term plans only.
- 6. Get health insurance: Healthcare costs are rising fast and having an effective health insurance policy can come to your aid in case of emergencies. Starting a Health insurance will address part of the health emergencies that may arise for you or your loved ones.
Choosing your investment advisor is equally important as selecting investment avenues. Choose investment options based on how long you can remain invested. Also, it is very important to monitor your investments periodically. This will help you to understand if your investments are growing as they should or if you need to change your investment.
Mutual Fund SIPs are generally considered to be the safest way to invest in stock markets. Debt mutual funds are good for short term goals (3-5 years) whereas equity mutual funds can give inflation-beating returns in the long run (5-10 years).
Start saving something before you spend. It can be as little but get into the habit of saving from the very beginning of your earning cycle. Try and save around 10% of your income, to begin with. Slowly increase it to the maximum you can afford to save.
Saving and financial planning are nearly as important as doing well in your job. Proper financial planning will help you realize your financial goals such as a house, a car, foreign holiday trip, marriage and retirement.
Posted: March 2018