Time just flies. Whether you do anything meaningful with time or not, it will move on at it's own pace. If we simply break our life into a timeline, first 20-25 years are spent in attaining education, building the foundation for the coming life, a good character and next 30-35 years in making a living ,earning a decent life for the comfort of our loved ones, working hard day in and day out to secure a bright future for our families and the rest of the life is may be spent in nostalgia , remembering good old days and spending more quality time with family.
Over the years, our country has progressed a lot and is poised to become a super power in the near future. Our standard of living (at least in Urban Areas) has become better significantly in recent times after liberalization of our economy. We are privileged to get the best of the education, health care, travel opportunities, access to global brands. Advancement in technology has made our lives even more at ease. Everything is available at a click of a button. With this betterment in standard of living, our expenses and in many cases, ambitions have also grown. Most of us are so much engrossed in the daily hassles of life that week after week just pass by and we do not find time to sit and properly analyze and do financial planning which would actually help in creating a even more secure future for our loved ones and help us realize our dreams.
Today, may be you have not started earning, but will surely do in near future. From my little experience, I have tried to gather few pointers which can help you start the thought process. First of all, we have to re-define our equation for Savings. From our school days, we have been taught : Income - Expenses= Savings ,but we must change our definition to: Income - Investment = Expenses..
Analyze your expenses, maintain a monthly expense tracker: You must start to track your expenses and differentiate them as Fixed & uncontrollable like rent, EMI and so on. Other expenses can be classified as One time, routine, etc. You can further bifurcate the categories into groceries, entertainment, travel, clothing and apparel, gifts and so on. Knowing your monthly expenses will help you decide which ones is to be avoided in future and would also help you maintain self discipline. Remember, a penny saved is penny earned and as we grow, our responsibilities increase and we must keep a tab on our expenses. If you spend too much on things which you don't really need, you would end up sacrificing on things which you would actually need.
Invest in different asset class, don't put all your eggs in one basket: You would be surprised to know ,in a country of close to 125 crore people, there are only 2 crore D-mat accounts (The country's two main depositories - Central Depository Services(CDSL) 96 lakh and National Securities Depository (NSDL) 1.37 crore accounts) where as the companies eligible in trading and listed in BSE is approx.4289.One major factor for such low participation is because of the misconception we have been told since our childhood- 'Share market is a gamble'. There's no denying the fact that stock market has it's share of frauds and manipulation but painting the entire market with the same color is not reasonable. Making a learned and rational decision with prudent judgment is most likely to be rewarded with handsome returns. Too much greed and investment in penny stocks has often duped investors. When we are young and do not have much liabilities, we must allocate maximum funds to directly stocks as risk taking capability is comparability higher. If you do not have requisite skill set or time to manage and diversify and churn the portfolio at regular intervals, you can always invest in good mutual funds or opt for SIPs to invest regularly. Remember the power of compounding. A simple investment of Rs.1 Lakh each year for 15 years will grow to Rs.35 lakh even at a nominal rate of 10%!
Avoid taking loans/credit cards: Now a days,we can avail loan facility for almost anything. Banks would be more than happy to extend a helping hand. Many young people burden themselves with huge home loans at a very young age and would spent almost 15-20 years in repaying the loan. I wouldn't argue whether buying a house with home loan is good or bad, but speaking strictly from financial point of view, it does not prove to be such a good decision. If you have taken a loan then the EMI should not eat up more than 30% of your monthly income. You must save, invest and repay the loan as quickly as possible. If you are planning to take home loans, then try to take as minimum as possible. You can opt to take loan from close friends and family which would help minimize the monthly obligation to a large extent. Talking about credit cards, many people say that what's the harm in deferring expenses when bank can take care of it and earn loyalty points which can be used in buying essential goods in future. A crude answer lies in human psychology. Once we have the ease of spending power, most of us would end up buying too many things in greed of earning more points and the line between necessity and luxury blurs. And precisely this is what a bank and other e-commerce companies feast on. There's nothing called as free lunch. You miss one payment and would end up paying hefty interest. Even the most disciplined can miss dead-lines and when it comes to financial discipline, banks know the trick.
Maintain an emergency fund and buy a good health insurance: Always set aside certain portion of your investment in liquid fund which can be used in case of emergencies. Buy a good health insurance for yourself and your family, specially your parents. Maintaining a healthy life style is always better but one cannot avoid uncertainties. So it's always better to be well prepared rather than paying up huge bill later. Medical expenses eat a large chunk of savings.
Plan you holidays in advance: We all deserve a well earned holidays to break free from daily hassles of monotonous life. Although it is difficult to plan holidays too much in advance but it is always prudent to do so, as booking early tickets- flight and hotels, can save you a lot of money specially during discount offers.
Most of us feel happy to have high degree of liquidity and park our money in savings account, which will earn you a nominal interest rate of just 4% or put in FDs . Even if FDs offer 8% interest rate, the real effective rate after taxes will be significantly lower, specially if you fall under the highest slab rate of Income Tax .So don't forget to discount taxes when ever you do your calculations. A proper tax planning always helps in lowering the tax burden.
Have an alternate source of income: Even if you are salaried employee or get into business activity, always have a secondary source of income. This would prove highly beneficial in case your primary source is little dried up. You can manage your standard of living without stress. Work on your strengths and make your week ends count. Don't waste time sitting idle.
I hope these few pointers gave you a direction for financial planning. We have to learn to embed financial discipline for a stress-free life and learn to differentiate between what is important and what is urgent. We should absolutely refrain from spending too much in things which are neither important nor urgent. There is absolutely no doubt that you will have to sacrifice short term volatile happiness for a long term sustainable happiness. You will have to sacrifice those short term 'feel good ' factors for a brighter future.
In the end, all I would say is, the best investment you would ever make is in yourself. Spend time learning and implement those learnings. Nurture your relationships and respect the 'Time value of life'. Wish you all a very happy and prosperous new year. May this new year bring new wisdom and happiness for all of us. Happy investing, spread financial awareness.
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