Money made you aspire for more. It fuelled your dreams and desires. Before the year began, most of you would have thought about things you could do if you had more money. A lot of you dreamt about owning a home or a fancy car or visiting a dream destination for a holiday. As the year 2020 draws to a close, a lot has changed. The outbreak of the Covid-19 pandemic and lockdowns enforced by governments around the world have dramatically shifted priorities.
Save more than spend
An introductory lesson in budgeting advised by financial advisors is to save more than spend. Your elders always asked you to live within your means. No matter your income. Creating a monthly surplus is the biggest challenge for most households. There are never-ending expenses. Then, inflation eats into your savings rapidly and incomes to do not rise in the same proportion.
There is a vicious cycle of excess expenditure over income. However, since March 2020, that cycle has been disrupted. Being locked at home meant that you could not travel; you could not go out shopping; you did not go to movie theatres; did not frequent your favourite coffee shop or restaurant. Suddenly, you found more money in your hands. A lot of you could not spend money even if you wanted.
The overall deposits in banks have grown significantly in this period. That is well documented by the weekly statistical supplement, monthly bulletins published by the Reserve Bank of India. A vital takeaway from the past nine months or so is that you can do with a little ‘less’ in life. Many of you may go back to your old habits of spending once things normalise. However, if you take that forward and make it a part of your life, you are setting yourself up for a better financial future.
Thinking financial planning
For long, you wondered about making a start with financial planning and investing. But the vicious cycle of excess expenditure over income never really allowed you to do so. If you manage to hold on to your monthly surplus even as things get back to normal, you may be able to create that necessary bandwidth to look at financial planning. Listed stockbroking companies like ICICI Securities and Angel Broking have reported an increase in the number of demat account holders.
Mutual funds have reported a sharp rise in the number of folios and unique mutual fund investors. A lot of you have sought to find ways to do something with the money. A problem like ‘What should I do with my money?’ is an excellent problem to have in these times. If you find yourself in that situation, you must get serious about financial planning and investing. Have conversations with learned friends and independent experts about the ways you can go about this.
More time means a lot
Saving money is an achievement. You deserve a pat on the back. However, that is not enough for your financial future. Things that you do with your money matter a lot. This column has often highlighted the importance of asset allocation. Based on your life stage, you must make the right allocation of your money across asset classes. A basic thumb rule is to weigh in favour of investing more when young. Your ability to take risks is better as you have time on your hands. An investment is worth your time if you consistently succeed in beating inflation.
Currently, your fixed deposits are giving you a negative rate of return. That is because the inflation rate is eating into them. So that cannot be an investment. If you are a retiree, you must keep your savings intact by putting them into fixed-income assets. However, if you are young and have surplus money for the past few months, you have no excuse.
You have time on your hands to plan well too. It is prudent to use the available time to learn about investing. Know more about the right asset allocation plans for you. Having both time and money at your disposal is a ‘never before’ situation and perhaps a ‘never again’ one.
(The author is editor-in-chief at www.moneyminute.in)