Financial planning is like minding a herd. Just like sheep or cattle, your money tends to meander. When you receive your paycheck, you want to ensure that you provide adequately for your future. You need to manage today’s expenses after setting aside a small portion of your income for tomorrow. When you start with financial planning, your ability to save money comes first. When you master that and create a surplus every month, you need to think about the direction your savings need to take.
Goal setting is a vital step towards financial security. It may be possible to just think about retirement, a child’s education or owning a home as your financial goal. When you list down your dreams and turn them into goals, you need to set a priority for those goals. Every financial advisor will tell you that you must figure out how to pay yourself first. That means saving for your retirement.
When you start saving for retirement in your 20s and 30s, you give your money the time it deserves. A period of 15-20 years can do wonders to your retirement savings due to the magic of compounding.
If you continue to invest more each year, that will help you create a corpus that will take care of your needs when you hang up your boots. Your choice of investments will make a difference to your investment.
In this column, we have argued that your investment consistently has to beat inflation in the long term. For that, investment should only mean equity assets when considering long-term goals. You can directly own strong companies if you have adequate business knowledge. The other option is to invest through mutual funds or index funds like exchange-traded funds. Under all circumstances, empirical evidence proves that equity assets outperform all other asset classes when invested for 20 years or more.
However, your life takes all kinds of turns—some for the better but some for, the worse. You need to make an adequate allocation for life insurance and health insurance. That is not an investment. It is a protection for your savings and your family. A sudden medical emergency could set back your ability to invest regularly. You have to figure out the optimal level of insurance needed. Many insurance agents and advisors would make you pay insurance premiums more than you need. You must regularly read about risks associated with your work and arrive at a desirable life and health insurance premium.
Once you get that out, all your money should be allocated based on your goals. You need more goals to meet your diverse needs in the future. Defining goals directs your savings and lets you make appropriate asset allocations. Your short-term goals, such as owning a car or a dream home, require you to save money to make the down payment. The assets you pick need to balance equity and fixed income. Your long-term goals, like a child’s education or retirement, are likely to be 10 to 20 years. Here, you are allocating a small quantity but for a considerable time. That helps you beat inflation comfortably if you allocate more money to equity assets than fixed income.
Financial Advisor
If you are confident about managing your investments, your financial advisor would be your knowledge. The more you read, the more you would protect yourself against potential risks associated with investing. The trick is to spend a few minutes knowing about finance every day. That way, if you are not associated with financial markets or not interested in finance, you can incrementally improve your understanding.
However, if you are not confident about doing it on your own, you must get a professional financial advisor. They are certified to help you at every step. You can extract more from your relationship with your advisor if you know the right questions to ask. Spending a few minutes every day reading about finance could help. There is no shortage of information available to you online. The onus is on you to make the most of it.
(The author is editor-in-chief at www.moneyminute.in)