There is a ‘phobia’ around the word ‘finance’. A lot of you perhaps sleep through conversations about money.
You may be able to appreciate some things said or may not. Your ability to make sense of things depends on your drive to put your money to use. It is unfair to expect everyone to take an interest in the analysis of interest rates in the economy. Dive deeper into factors that influence interest rates. People aware of finance are a very tiny subset of the whole population.
However, if you wish to put your money to use and create wealth for yourself, you need to have some sense of financial planning. It is an essential tool to help you give direction to your savings. That is assuming you are saving more than you are earning.
Money is a significant enabler. While it may not guarantee happiness, it will open new doors and opportunities. If you have it, you can put it to use through investing. The only way for your money to grow is through regular investing. Equity assets over the long-term help you beat inflation and create wealth.
Your first step in financial planning is to get into a habit of saving money. Once you manage that, you can look at things that can help you secure your financial future. You have an option to engage a professional financial advisor registered with regulatory bodies like the Securities and Exchange Board of India, Insurance Regulatory and Development Authority or quasi-regulatory bodies like the Association of Mutual Funds in India.
Some certified financial advisors can work with you to create a financial plan aligned with your life goals. If you are not too keen to dive in so much, you need to do a few basics to take care of your unexpected expenses and secure your sunset years. For a start, you may want to take a plain vanilla life insurance policy that covers loss of life. Your health insurance comes next as the second layer of security.
When you start work, most advisors will suggest paying yourself first. That means putting aside money for long-term goals like retirement. If you are in your mid-20s, it is an ideal time to set aside a small portion for your retirement. The longer you invest in the retirement pool, the better it will be for you when you turn 50.
In America, in the 70s and 80s, salaried individuals put money in 401 (k) plans. It is a defined contribution pension plan where an American employer puts money along with the employee. The US government encouraged households to allocate more savings towards these plans. It became a wealth creator for the salaried class in America. The total retirement assets in America stand at a staggering $37.5 trillion as of 31 March 2022, according to data from the Investment Company Institute, an American association.
You can choose between ‘defined benefit’ and ‘defined contribution’ in India. Defined benefit schemes like a public provident fund or National Savings Certificate guarantee a return. The return on your employee provident fund is also guaranteed. However, the National Pension System or NPS is the defined contribution scheme. It is a game changer for Indian households, just like the 401 (k)s were for American households.
About 1.6 crore NPS accounts are currently active, with assets under management of Rs 7.23 lakh crore. The number may sound significant, but it is barely 3% of India’s gross domestic product. Even if you add provident funds and other government-sponsored schemes, the official number may not cross 5% of GDP. The US retirement assets are 150% of the GDP. For most Indian households, a retirement plan is a property they own or gold. Even worse is the expectation that children would take care of them.
Indian households need to grab the NPS opportunity with both hands.
After paying an annual insurance premium for life and health, your NPS account would take care of your sunset years. It is as simple as it can get for your finances.
(The author is editor-in-chief at www.moneyminute.in)