Money is a strange thing.the more one has, the more one wants. An individual generally has a care-free financial life till such a time as he does not start earning by himself. The moment he completes his education and gets a full-time job, the questions and confusions are as myriad in number as they are confusing in nature. How much to save, how much to spend, where to invest, what about tax implications?.the questions come thick and fast.
While financial planning is a vast topic and can easily bewilder anyone, we never-the-less need to know the basics of financial planning for a secure and comfortable future both for the sake of ourselves as well as for those who depend on us. We come across a whole lot of people ranging from parents who speak out of experience to friends with Economic Times tucked under their armpits, all giving umpteen number of sermons which only compound the problems for us.
My onus in this review would be to concentrate primarily on the factors to be considered before making an investment and the various investment options available in the present day. After considering the reactions to this review, maybe myself or someone else could go a little bit deeper into the subject.
I. Why do I need to invest in the first place?
While most of us(bachelors) gleefully engage in blowing up a major portion of our monthly salaries, little do we realise that we don’t have anything to fall back upon in times of financial contingencies. It therefore makes eminent sense to stack away some minimum portion of our pay towards investments to bail us out on a rainy day. Remember that a rich man is not one who has the most but he who needs the least.
There is a very fundamental difference between savings and investment here. When you save money, your capital is secure. You are guaranteed to get back the principal sum you put in, plus interest(if it is in deposits, post office savings scheme, etc, .). On the other hand, When you invest you have no such guarantee. Savings may mean anything from sitting on idle cash at home to stowing away some amount in SB accounts or FDs(Fixed Deposits) in banks. Investments, on the other hand are avenues like shares, debentures, mutual fund units, bonds, etc. where one puts in money and gets fixed/variable returns on the same over a period of time.
It is not my intention to dissuade anyone from doing what they are comfortable with. However, I wish to highlight a few common misconceptions here. Sitting on idle cash stacked away in the almairah at home is the most sinful thing to do because it does nothing other than dwindling the value of all that hard earned money as it does nothing to counter the voracious appetite of a monster called “Inflation”. When the purchasing power of money dwindles with time, the phenomenon is called’Inflation’. This is manifested in a general rise in prices of goods and services.
Let us assume that the inflation(the rate of change in the prices of essential commodities) is around 5% on an average during an year which effectively means that goods are going to cost more, one year down the line. You have Rs. 100 and want to buy a shirt with that amount either today or one year down the line. You decide to buy it after one year and tuck away a 100 rupee for that purpose. At the end of one year, the cost of the shirt increases to Rs. 105(Rs. 5 more than what it costs today). On the other hand, if only you would have invested that money in a safe fixed-income bearing investment, you could have had Rs. 110 and still have Rs. 5 left over after your shopping. Got that right? No wonder investing is always considered a good thing to do in order to beat Inflation.
A few things to consider before you start investing.
Please ensure that you clear off all or at least most of your outstanding debts on loans and credit cards as they are worse than inflation itself and it is unlikely you will make more from your investments than you will need to pay for your debts. So pay off your debts first because it probably might turn out to be the best investment you will ever make.
Keep aside some amount of cash that you can fall back upon on a rainy day. Whatever is left after this can be used for investing.
Be mentally prepared that an investment is for a minimum period of 3-5 years and plan your cash flows accordingly.
II. How much should I invest?
This is question is dependent to a greater extent on factors like an individual’s earning capacity and spending habits and propensity to save and invest rather that anything else. Jot down on a piece of paper your net take-home salary and other income if any and deduct the expected monthly expenses(personal, household, etc.) from it. This will give some idea of where your money is being spent and pinpoint the unnecessary expenses. Make it a point to allocate a minimum portion of the balance amount towards investments.
One also needs to look at his/her short and long term financial needs and plan accordingly. One may plan to get married and start a family or take a housing loan to purchase/construct a new house. Other typical goals are children’s education, enjoying a holiday abroad, purchasing a new car, etc. With the needs now identified, it is time to formulate the investment objective. Investment objectives can be quantified by a percentage return that is required on your investments to meet your future needs. Suppose I intend to buy a laptop costing Rs. 75, 000 one year later, the first thing I would decide is as to what percentage of my monthly income would I need to save and invest every month for it.
III. Where can I invest?
Before we go about answering this, it is imperative to know ones risk taking ability because every investment carries a certain amount of risk with it. After determining the risk taking ability it is important that you invest money across different asset classes.
The following are the most commonly available investment avenues available:
Equity shares
Debentures of highly rated corporates
Gold and Real estate
Mutual Funds, etc.
Each of the above mentioned categories have their own risk and returns matrix which therefore necessitates a careful evaluation based on each individual’s needs and risk profile. It is by and large recommended by financial pundits that a good investment be spread across a range of investments in different proportions rather than concentrating the whole corpus in just one instrument.
Deciding on the right investment mix is an integral part of managing personal finance. All said and done, money is an instrument that provides us comfort and happiness in life and therefore it is important that it is well planned and managed over a period of time. Setting a definite financial plan based on future needs, zeroing in on the right mix of investments to suit the individual risk profile and executing the same with good discipline gives mental peace and ensures that you don’t get struck in a financial muddle at any stage of life.
Have I made things any clearer or are we back to square one?