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  1. Do not invest your money with wrong time horizons or needs

Do not invest your money with wrong time horizons or needs

Living for the moment has become the stated mantra for today's generation as savings and investing for the future looks like a distant goal. Many wrongly assume that the goal can be achieved as easily as the goal of immediate gratification.

By: | Updated: June 28, 2016 9:49 AM
black money

With most working in the private sector, it is important to ensure that we have enough in the kitty to manage and live comfortably after retirement. (Reuters)

Living for the moment has become the stated mantra for today’s generation as savings and investing for the future looks like a distant goal. Many wrongly assume that the goal can be achieved as easily as the goal of immediate gratification.

Life stage planning

With most working in the private sector, it is important to ensure that we have enough in the kitty to manage and live comfortably after retirement. And it’s in your own interest that you plan for the non-earning period of your life journey, in the very moment you embark on your earning journey. The reason and logic are simple: The power of compounding. If you save and invest even a meagre amount early into your earning career, the power of compounding can make it grow larger. Since this cannot be felt and experienced (as in the case of real assets), you need to see and track the growth of the same.

The basic step is set aside 10-20% of the net take home income right from the day you are employed. Pay yourself first is the mantra. In today’s time, you as an employee should work in the mindset of an entrepreneur.

Make a budget and record the transactions diligently in the same. Today, we have enough apps to make the recording process easy and on-the-go. Do remember, what is noted, is recorded and is monitored. You need to monitor and take action for any deviation or any surprise. This also tracks your spending habits and you can take a mid-course correction, if required. At the end of the day, it’s your money and it’s your duty to ensure that the money is used wisely. The goal is to ensure that wasteful avoidable expenses and splurge can be contained and the residual amount post the initial investment of 10-20% of your earnings can be saved and invested.

Also, you need to ensure that the money is not invested with wrong time horizons or needs. Your long-term investment needs must not be in short-term funds and short-term investment needs not invested in long-term products or equity. The power of compounding and inflation are the factors, which you need to watch out and the former should be more than the latter at all times. You can also take a look at the Coffee Can Approach in investing, in which you buy the investments ( more often than not – equity) and leave it as is. More commonly known as – ‘Buy & Hold’. There are enough instances wherein this approach has paid rich returns over a multiple years.

We tend to overestimate what can happen over a shorter time frame and tend to underestimate what can happen over a longer time frame. Today, while you are earning you also need to ring fence your risk, both your financial and health. Do ensure to have a pure term plan and health cover – individual or floater. Do not be stingy with the premium and try to go for the lowest premium. Look into the measurable factors like claim settlement ratio, multiple payout options, branch network, hospital network, insurability for life, ease of transactions. Only then go for the covers. And once you have both the investments and risk in place, go ahead with your dreams and implement those.

It is real that one needs to plan for the finances for the longevity in our life. We should not worry whether we will outlive our income or income will outlive us. The latter part is scary. We should plan and execute for the longevity. Earmarking a part of the corpus for this part of the journey is paramount in the life-stage planning process. The steps are elementary and simple to plan and execute. What is needed is your willingness to execute and be disciplined.

The writer is founder and managing partner of BellWether Advisors LLP

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