When you get your first salary, the instant question that comes to the mind is: ?What to do with it?? If you start saving small amounts from an early stage, you can reap benefits in the long run due to the power of compounding. Suppose you invest R20,000 annually for 10 years from the age of 20. After that, even if you stop putting in more money but stay invested, the investment will grow to R16,04,740 when you reach 65 years. If you start investing the same amount at the age of 40 and continue to invest till 65, the corpus will be only R13,55,530.
Prepare a budget
A proper budget will ensure that savings and investments are done regularly and unnecessary expenses are kept at bay. It is important to check the budget regularly to see if your expenses are within the budget or if they have gone over your income. If you are in the green (income is greater than expenses) then your budget is working for you. If you are in the red (expenses more than income), it is time to rationalise costs.
Assess risk profile
A self-assessment is in order to to understand the level of risk you are willing to take. Typically, higher risk assets yield higher returns and vice versa. If you are able to bear risk and volatility while investing in riskier assets, equity based products are a good option. Else, it is advisable to go in for safer debt-based investment products or a combination of equity and debt, or balanced funds.
Make a financial plan
You need to clearly define your financial goals. The clearer the goals, the easier it is to have a plan in place. Once your financial goals are charted out, the next thing to focus on is drafting a road map to achieve them. Review your current investments, insurance and other assets before making a plan. Once a review is completed, decide on investment avenues. This will be based on your risk profile, age, earning capacity, taxable rate, etc.
Invest in right assets
Invest in accordance with your risk profile and financial goals. Have a judicious mix of equity and debt to ensure that returns and capital are both protected. Debt avenues like fixed deposits in our country give high returns, with some nationalised banks offering 9%. However, interest on FD is taxable. Another good investment option is equity-linked saving schemes via the SIP route, since with the lock-in, the fund managers have more leeway to invest in quality stocks, giving better returns in the long run.
Invest on a monthly basis (through a systematic investment plan/systematic transfer plan), as this will give you the double benefit of regular investment and compounding as well as negating the need to time the markets. Ideally, you should automate this process to avoid any last-minute delays in investing. Automating the investment process by a direct ECS transfer to a mutual fund/recurring deposit would help ensure the savings objective is met. It would also curtail impulse spending.
Have an emergency fund
There will surely be items on your expense list that were previously not budgeted for, such as medical emergencies. Always keep aside some money for emergencies in liquid form (ideally in cash in a separate savings account). Ideally, save 4-6 months of living expenses in this account.
The writer is founder and CEO of Right Horizons
