Most of the youngsters who are below 30 years of age are more concerned with flashy lifestyles or are in search of high returns earning products in double quick time. The purpose of this article is to give a road map to our youngsters so that they can financially secure their future.
- It is very important to live within one’s means only. As a thumb rule, maximum expenses per month/year on one’s life style should be restricted to 50% of one’s income. This not only builds discipline but also cuts most of the unwanted wasteful expenditure.
- Now the savings (which is 50% of the monthly/annual income) could be invested in two strategies equally. Under the first strategy, one should invest 25% of one’s income for planned short to medium term expenses. This could
be parked in safe and liquid avenues like savings account, short term deposits and if required short term debt mutual funds. This strategy will give a lot of comfort in case one is faced with job losses or any other financial crunch.
However, access this only, when necessary, as the monthly expenditure has to be managed from the point 1 above only. - Remaining 25% of income should be deployed in long term investment products with equal allocation to conservative and aggressive investments. These should not be accessed for any short/medium term requirements. Investments here could be illiquid so that long term wealth building happens here. Tax saving investments for Indian Residents (Sec 80C and Sec 80CCD) could be planned from this portion. Typical products for Indian Residents could be PPF, NPS and diversified equity mutual funds.
- It is also important that one focusses on one’s career at this phase and hence it would not be good to invest in real estate. The same could be invested post one gets clarity on one’s career and marriage. So, till then stick with financial
assets which are easy to move. - Have a very good health insurance plan not only covering self but also those who are financially dependent on you. One has to look beyond the employer cover as this will not be valid if one loses job or during the phase of changing
jobs. - Buying life insurance plans should be initiated if and only if someone is financially dependent on you or one has large loans taken for education or for purchasing a house. Do not invest in these as a savings/investment tool no
matter what the agent says. - PPF is an excellent product for long-term investing as it not only helps one to save tax under Sec 80C but also builds an assured long-term portfolio with a 15-year time frame. Rs 1.50 lakhs invested annually for 15 years will grow to
roughly Rs 40 lakhs @ 7% p.a. (assumed) Interest rates can keep varying but the growth comes from long term orientation. - Equity linked mutual funds can be part of long-term investing and should be invested on a gradual basis to reduce the risk of market timing. Maximum of 4-5 schemes with different styles should be sufficient. Do not track daily.
- Always invest in well-regulated products and take financial advice through registered intermediaries/advisers.
- The above points are also applicable as one gets older and has larger income/wealth. Slight modifications might be required taking personal circumstances into consideration.
Just to give a sense to the above-mentioned points let us imagine, two individuals Peter and Paul of the same age (30 years) and earning same income of Rs 25,000 per month. Peter manages his lifestyle as mentioned above and invests 25% (Rs.6,250 per month) diligently for long term every month for next 30 years. He settles for a modest return of 10% p.a. Paul on the other hand invests only 10% (Rs 2,500 per month) and spends 90% of his income on his life style. On the 10% investments, Paul breaks his head to get the highest return and gets investment products earning 15% p.a. After 30 years, when Peter and Paul meet, wealth of Peter would be Rs 1.41 crores and Paul has accumulated Rs 87 lakhs. It could be noted that getting high returns consistently for individuals like Paul is not that easy and hence a focus on higher savings is important. Let us say Paul defers his savings by 10 years (starts at age 40 years) and doubles his investments (Rs 12,500 per month) for next 20 years. He also settles for modest returns of 10% p.a. His accumulation would be still roughly Rs 95 lakhs which is much lower than that of Peter. Postponing investments can be very costly.
The conclusion is very clear: focus on living within one’s means, start early, target moderate consistent returns, invest in simple products. Also, highest returns are made by investing in self-knowledge and hence devote time and resources to
upskill oneself. The above-mentioned investments will start paying off once you are not working actively. Hence, for most of us tracking markets and economy on a daily basis is a pure waste of time and energy. It would do well to partner
with a financial coach who can hand hold in one’s financial journey so that the financial mistakes are reduced. Starting to save and invest early helps one to reach financial independence early. Ignore this at your own risk!
We request you to get in touch with us at 9845557582 or naveen@naveenrego.com, for further clarifications.
Stay safe, healthy and wealthy!!
Note:
1. Market linked investments like Mutual Funds and Equity share investments are subject to market risks. Kindly read the scheme information documents carefully before investing.
2. Past performance of any asset class is not an indicator of future performance.
3. It is very important to consult a Professional Planner/Investment Adviser while implementing any of the above ideas.
4. The above are mere suggestions and not Investment Advice as individual cases might differ.
5. With the passage of time some of the above tax laws/financial products might change or not be available.
Naveen Julian Rego-CFP
SEBI Registered Investment Adviser
INA200004250
31st July 2021