Most people don’t start saving from the day they start earning. Even for those who save, money lies idle in savings account. It is only 3-5 years into professional lives that we get serious about investing. In one of my previous posts, I had discussed financial planning tips for the new financial year. These ideas would have been better appreciated by our readers who have been working for a few years.
In this post, we will discuss a few personal finance tips / ideas that everyone starting his/her professional life should be aware of. These are not out of the box ideas but it is better to have these ideas at the back of your mind when you get initial salary credits in your bank account.
Making good financial decisions and avoiding bad ones are equally important. For example, you might pick up two very good stocks but a bad stock pick will wipe off the profits of the two good stocks.
Additionally, financial products may require long term commitment on the part of the investor. For instance, a life insurance products (especially those which provide investment benefits too) typically require the investor to pay premium for 10-15 years. So, if you purchase a product that does not fit your financial needs, you will regret it for many years. Even surrender of such products may involve high penal charges.
Here are a few personal finance tips that young professionals would well to be aware of:
#1 Start investing early and appreciate the power of compounding: Rs 10,000 invested per month in a mutual fund can compound to Rs 23 lacs in 10 years and Rs 50 lacs in 15 years (assumed rate of return 12% p.a.). So, you can see difference if you are late by 5 years. Similarly, a rate of return of 10% will yield only Rs 20.5 lacs in 10 years and Rs 41.5 lacs in 15 years. You can see the difference if we let your money compound at a lower rate.
#2 Save/invest first and spend later: Most of us do it the other way round. Even the legendary Warren Buffet subscribes to this philosophy. Of all things required to become the great investor that he is, this one is probably the easiest.
#3 Never underestimate the power of inflation: If you are 30 and your monthly expenses are Rs 20,000 per month, at an inflation rate of 7% p.a., you would require Rs 1.52 lacs per month by the time you retire. Specific inflation (medical services, education etc) can be far higher than general inflation.
#4 Do not borrow unnecessarily: Borrow only to create an asset (home loan), for education or if it is unavoidable. Taking a car loan when you are expecting a baby or to take care of an ailing relative makes sense. However, taking a personal loan for vacation abroad makes little sense.
#5 Purchase adequate life and health insurance: Life is fickle. You need to guard against exigencies. You must ensure that your family needs are taken care of even when you are no longer around. Don’t get fixated with random round number (say Rs 50 lacs or Rs 1 crore). Assess your life insurance requirements properly. Purchase health insurance to avoid any hit to your savings in case of medical emergency. Wealth preservation is as important as wealth accumulation.
Book Suggestion: Rich Dad, Poor Dad (Robert T. Kiyosaki)
#6 Don’t mix insurance and investment. Don’t invest merely to save tax: I have been guilty of this crime too. Everyone who does not finance education background is susceptible to making this mistake. A lot of us invest in high cost and complex insurance products towards the end of the financial year in the rush to save on taxes.
When the sales person (agent/financial intermediary) talks on dual benefit of insurance and investment, the picture looks very rosy. When the same sales person happens to be a family friend or relative, there is an obligation angle too. To add to it, we simply cannot say “No” for the fear of looking bad.
However, you finally sit down to assess your purchase a few years later, you realize neither are you adequately insured nor are the returns any good. I made this mistake. You don’t have to repeat it. Purchase a pure term insurance plan and invest the remaining money in good mutual funds.
#7 Money for short term goals in debt, money for long term goals in equity: Don’t complicate your investment unnecessarily. Never park those funds in equity funds that you might need in the next 2-3 years. Similarly, for long term goals such as retirement, have an equity heavy portfolio. You can also invest in PPF/EPF for long term savings but allocate a greater portion to equities. A home to live in is not a bad investment either.
#8 Keep an emergency fund: Do keep 3-6 months of your expenses in a savings account, fixed deposit or a liquid fund. This avoids eating into your savings in case of loss of employment or any emergency.
#9 Diversify your investments: Don’t put your eggs in one basket. You must get your asset allocation right. It is not wise to have all your assets in equities even if you are very young.
#10 Stick to investment discipline. Slow and steady wins the race. You will be fortunate if one of your stock holdings doubles in a month once or twice in your lifetime. Still a number of people I talk to want to hear about the next buzzing stock. Mutual funds are too conservative for them. You can be rest assured average investors like you and I will be far better off investing in mutual funds through Systematic Investment plans (SIPs).
#11 Do not act on stock tips: This is a sure shot recipe for disaster. You will be better off going to a casino and gamble your money away.
#12 Do not trust any financial intermediaries blindly. Do your homework: You will taken for a ride if you do not conduct due diligence. I am not raising question marks over intermediaries’ integrity. They have targets and every sales person (and not just financial intermediaries) goes slow on unfavourable features of the product to increase chances of a purchase. No matter what they say, it is your job to understand the product features well before you make the purchase.
PersonalFinancePlan Take
This is not a comprehensive list of personal finance tips. However, you will do much better keeping these things in mind while you are making a financial decision. It will do your long term financial health a lot of good.
However, don’t make every decision in your life a financial decision. Money is not an end into itself. It is merely a means to an end. Don’t overdo the investment part. Enjoy your life.
Reading Suggestion
Rich Dad, Poor Dad (Robert T. Kiyosaki)
Image Credit: Jeremy Jenum. Original image and information about usage rights can be downloaded from Flickr.com
