In a survey in the USA, the following emerged as the biggest financial regrets…
What chances are that if we did an Expenses survey in India, we will come up with something like this? Well, this article is not about the Indian position, but is far more personal!
See where you stand in this food chain….If you do not have an emergency fund, no SIP, not enough medical insurance, have not opened a PPF, and you have a job without much of provident fund, then, clearly, you are at the bottom of the wealth pyramid.
At this stage it will not be a bad idea to skip a 3-day trip to Goa with friends – this could set you back by say R 20,000. This amount will look very pretty sitting in an emergency fund rather in a travel agent’s profit and loss account!
Let’s say you have an emergency fund, you pay off your credit card debt in full, always, and have pared down your educational loan. Now you just have a small educational loan, being repaid rapidly, a good stable job with good cash flow.
At this stage you do not have to think too much about going to Starbucks for a coffee – a R289 coffee is not going to kill you, but wealth creation is still Work-In-Progress stage.
You are now 33, have a fiancée, both of you have a take home of R95,000 each – so R 190,000 per month. You have a mortgage of R54,000 and a car EMI of R22,000. You have your emergency fund in place, educational loans have been paid off, you are doing a SIP of R 20,000 a month. Now you can afford your Goa vacation but at a three-star hotel and no fancy Cruises.
However, your EMI is 40% of your take home pay, and it would be healthy if it was 30%. This could happen with your salary going up in a year or two or your car mortgage coming to an end. At this stage, what could hurt you is poor investing, but you are now not going to be hurt by spending on a business class ticket instead of an Economy ticket.
Maybe it is time to increase the SIP amount that you are currently doing, from 10% of take home pay to 20% of take-home pay. Of course, this will be easy once the car EMI stops.
These are just examples for you to see how to plan your own life. Most young readers would fall in one of the above three categories. In case your numbers are better than these – for example you earn more than these people, you should invest more. It may make sense to reduce all the loans or invest in more aggressive assets like ‘Technology fund’ or ‘health-care fund’ or the types.
See what fits you well, ask more questions and get prepared.
Bottom of the wealth pyramid
If you do not have an emergency fund, no SIP, not enough medical insurance, have not opened a PPF, and you have a job without much of provident fund, then, clearly you are at the bottom of the wealth pyramid. At this stage it will not be a bad idea to skip a 3-day trip to Goa with friends.
PV Subramanyam
writes at www.subramoney.com and has authored the best seller ‘Retire
Rich - Invest C 40 a day’