On the occasion of Father’s Day, it is important to revisit some of the roles that parents typically play. One of the important roles is that of being a financial role model for their children.
On the occasion of Father’s Day, it is important to revisit some of the roles that parents typically play. One of the important roles is that of being a financial role model for their children. The lessons they pass on are both in terms of explicit advice as well as lessons passed on by being a role model.
There are many life lessons that fathers pass on to their kids. In this article, I focus on financial lessons.
The first lesson is to learn to be financially independent. For this a good education is a must. However, while pursuing education, don’t drown yourself in debt. Debt can limit your financial independence and can limit your choices. Having an EMI can prevent you from starting your own venture, should you wish to do so. While parents can do their bit in financing your education, you should also try to work part time in order to keep debt down to a minimum. After education, while debt can be an option for many purposes like buying a home, a car or a holiday, it is best to minimize if not avoid debt. If you do have a loan, it is best to pay it down as soon as possible.
The second lesson is that while one hopes for the best, you need to be ready for the worst. An emergency can cause financial distress, and the impact of this can be long lasting. It is also impossible to predict when an emergency would arise. To protect yourself and your family, buy health insurance; also make sure that the plan protects you from critical illness.
It is important to save money, this is the third lesson. To achieve this objective, it is important to budget expenses and savings. As a thumb rule, you should be able to save about 30% to 40% of your post tax earnings. This will help you to create a cushion to deal with emergencies and other unexpected expenses, to provide for known large expenses like buying a home and lastly to build wealth for your long-term future. This can be hard to put in practice. After all the best laid plans can go awry. What can derail these plans are temptations and impulsive purchases and one should step back and think rationally before spending money. Also, set up a budget every month and try to stick to it. It is important to spend on having fun, and this should be part of the budget.
In addition to saving money, it is important to invest it widely, this is the fourth lesson. Asset allocation is the key to build wealth. Keeping money in low-yielding savings and fixed deposits can impact your long-term future. Savings need to be invested in a mix of assets. Equities are an important part of the mix for building long-term wealth. This can be achieved by buying stocks or equity-oriented mutual funds. Fixed income is another part of the portfolio to provide for known short to medium-term expenses. This can be achieved by investing in fixed deposits as well as debt-oriented mutual funds. Set aside an emergency fund in savings account. A younger person can assume more risk and up to 70% to 80% can be invested in equities, and as one ages, fixed income gains importance. By the age of 50, one should invest 50% of incremental savings in equities and about 40% in fixed income and the balance can be set aside for emergencies.
The fifth lesson is to adapt a long-term mindset. Life is a marathon, not a sprint and while adapting a financial plan, it is important to keep long term objectives in mind and not to get swayed by short term trends or fads. While short term requirements need to be provided for, long term objectives should not be forgotten. These long term objectives could be buying a house, having a retirement kitty or having funds to start your own enterprise.
The sixth lesson is to be financially literate. While this is the age of specialization (indeed super specialization), one should know the basics of financial planning. This can be achieved by learning through books, speaking to financial advisors and experts and following financial news.
The seventh lesson is to love what you do for a living. India is a young country which opens the door for many opportunities. The coming years might be the best time to be an entrepreneur. To become one, it is important to plan your finances carefully (please look up for some tips) and build a corpus that can be used as initial capital for your enterprise. If you can demonstrate success, there is capital available that can back you up but financial planning and literacy is important to give shape to your ideas.
The eighth lesson is to review your finances regularly. This is not only because your needs may change but external environment may change as well. It is important to make changes to your investment plan according to circumstances.
Lastly, it is important that while you work hard, don’t forget to have fun and not to get bogged down by the day to day necessities of life. Managing finances is a necessity but should not become a chore. If you follow the tips I have shared, I am pretty confident that these will help you succeed.
(By Rajiv Singh, CEO-Stock Broking, Karvy)