Ramganesh Iyer, Co-Founder, Fisdom.com
For those in India’s vast and growing middle class, it seems to be a lifetime balancing game between the ever-increasing financial goals (and associated expenses) and income. Many have ambitions of owning a nice home, a fancy car and the latest gadgets – but wonder if it’s possible with their income.
Our years of experience with money and wealth management suggest that this is very much possible – if one adheres to 3 simple rules:
Rule 1: Lead an ‘appropriate’ lifestyle
Needless to say, wealth can be managed, only if surplus money is created in the first place! This needs an ‘appropriate’ lifestyle – but what is appropriate?
A few thumb-rules can help you decide if the lifestyle you lead is appropriate or not.
- If you are single/have no dependents, save atleast 30 per cent of your income
- If you are married or have dependents, save atleast 15 per cent
-Keep track of (major) expenses – it’s easier to budget and cut down, only if you know where the money is going in the first place
-Avoid credit cards or EMIs – they encourage you to spend more than you can afford
-Avoid loans, except for assets like home and education. Avoid personal loans, auto loans or loans for buying electronics
Rule 2: Prepare for uncertainties
Everyone faces uncertainties in life. But there are simple things you can do to make sure your financial boat isn’t sunk by one of them:
Take a (term) life insurance
The ‘term’ insurance policy is the only useful policy there is – it has a very low premium. All other ‘endowments’ or ULIPs or whole-life plans only enrich the broker, not you!
-Ensure you have a life cover 8-10 times your annual income, if you have dependents
– Take a life cover only on the earning member(s) of the family – not on children or the retired
-Take a family medical policy
-Use the ‘family floater’ medical insurance to cover all members of the family in a single policy
-A cover of between Rs 3 lakh to 5 lakh is usually appropriate
-Ensure money equal to 6 months of expenses is kept in a place that’s easy to take out when needed
Rule 3: Beat inflation
You may save a large amount of money, but you grow wealthy only when the money works for you. This happens when money earns for you, more than what inflation (price-rise) eats away.
The only products that beat inflation over a long period of time are equity (or equity mutual funds), real estate and gold. Everything else – from bank deposits, PPF, post office schemes to insurance policies – returns less than inflation and hence destroys your wealth over a period of time.
Of these, equity is the best place – it allows you to start small and invest regularly, has the lowest tax rate and also makes withdrawal very easy. But given the risk involved, you need to take care of a few things:
Invest only for the long term (>5-7 years), never trade
- Use the mutual fund route to invest, to take advantage of the experts
- Put money every month, rather than lump-sum. There is something called ‘Systematic Investment Plan’ (SIP) to facilitate this
- Bank fixed deposits are useful, but only if you want to park money for the short term (<5 years). Over longer periods, their returns are less than inflation and hence your money loses value. Insurance policies give even poorer returns, and carry a longer lock-in.
In summary, leading a financially successful life is a lot easier than you think, no matter how much you earn. You just need to ensure you save adequately, and make sure the saved money works for you over a long period of time.
To give an example, say you had invested Rs 10,000 every month from Jan 2001 till end of 2015 (i.e. Rs 18 lakh in all over 15 years). Your money in any good mutual fund today would have been worth over Rs 1.2 crore! In contrast, it would be only a third of that amount in PPF or in a fixed deposit.