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3 Rules To Successful Financial Planning

This article has been published in “The financial express” on 11th August, 2016

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.

 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.

-Save adequately

  • If you are single/have no dependents, save at least 30 per cent of your income
  • If you are married or have dependents, save at least 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.

Summary
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.

Not yet thought about building wealth? Start your SIP now at as low as Rs.500. Yes. Rs.500.

Who doesn’t want to build a tidy sum of wealth over the years? But you probably are unsure where and when to start.

The simplest product gives the highest return
It’s easy to get confused in the din out there – ULIPs, ‘child plans’, ‘pension plans’, chit funds and even the neighbourhood ‘aunt’ peddling an LIC policy. These complex products are poor investments.

There is no better wealth creation engine than the equity market. Equity markets give 15%-18% annual returns over the long term. And a mutual fund is the best vehicle to invest, for those who don’t understand the markets.

A monthly automatic investment in a mutual fund (called SIP) ensures you put away money regularly for the future. You can start as low as Rs 500 per month. Technology allows you to provide a bank mandate and automatically transfer money on a fixed date every month. The money, should you need it, can be withdrawn online at a day’s notice.

The time to start is now!
If you had invested Rs 5K every month starting 2001 right through 2015, you would have invested Rs 9L in all. Can you guess what this would be worth today – Rs 75L – that’s over 8X growth!

If you had delayed starting by just a couple of years (2003 instead of 2001), your wealth would be less than Rs 35L. In other words, the punishment for starting late is severe.

 

Does fixed deposit give you the best returns?

Does fixed deposit give you the best returns?

Usually, no! FDs are the best only if you fall in the lowest tax bracket or are a retiree.

While bank fixed deposits are undoubtedly safe, their returns are poor. In fact, over a long period of time, they tend to return lower than inflation – so your purchasing power actually reduces if your money is stored in fixed deposits over long periods of time. Fixed deposits are useful only if you need the money within the next three years.

Over the long term, there is no alternative to equity if you want to stay ahead of inflation. You can either directly invest in stocks, or, if you lack the time & expertise, take the mutual fund route.

 Conclusion

Fixed deposits give assured returns. So, traditional investors have parked their savings in FDs. However, three things which need to be considered:

  • Fixed deposit returns are lower than inflation. Your money loses value over time.
  • Breaking fixed deposit or premature withdrawals always comes with a cost. It will be an inconvenience when money is required during an emergency.

At present, interest rates on fixed deposits are between 6% to 8%,depending on the time period of investment.Retirees, persons in the lower tax bracket or those needing money within 3 years can opt for fixed deposits.

Shubharambh: Build Wealth

Build Wealth today. There is no time better than now.

Who doesn’t want to build wealth over the years? It’s just that we don’t know where to start. It is fairly obvious that the best chance to grow wealth is when we are earning. But the process just seems so daunting – sparing some money after all the expenses, planning how much to save, doing paperwork, etc. As a result, we don’t start at all. Instead, we just focus on earning and assume money will take care of itself. Worse, we occasionally go on a guilt trip and buy some random product recommended by a distant cousin or banker – an endowment, a ULIP or a ‘child plan’.

A famous Chinese proverb says: ‘A journey of a thousand miles begins with a single step’.

Now, we’ve made that single step very easy to take. With no paperwork, it can be taken anywhere and anytime right on your mobile phone. You start a simple systematic investment or SIP on your mobile, with as little as 500 per month. Consider this: if you had started investing 500 per month in 2001 and continued for 15 years, you would have had 5.5 lakh by now. If you started just one year later, your wealth would be less by 1 lakh today! So it’s important to start early with whatever little you have, rather than wait for that perfect time and money to start.

So what are the hurdles to build wealth today? If you think about it, none!

  • There is no paperwork to get started. Download the fisdom app, and click snaps of your PAN card and address proof – you are done. This completes the one-time registration the government wants you to do before you start investing.
  • Not sure which product to choose? The app gives you simple recommendations, based on a wealth of research done at the back end. If you are interested in knowing more, you can read up about the funds in the app itself.
  • Don’t know how to invest? The app also provides a secure payment gateway, where you can use net-banking to transfer money once. Thereafter, you sign an ECS mandate so that money gets transferred from your bank each month to the fund.
  • Want to withdraw money at any time? Again, you just choose the amount and tap on the app. The fund gets withdrawn and money credited to your bank next day.

So, start today to make your money work for you, rather than watch your peers getting ahead and regret the delay later!

Goal-Based Investing – How Does It Work?

Investing with a goal is very important. Read to know why.

Your goal / objective form the starting point for all our research and algorithms to rally behind.

Through a couple of simple questions, we learn from you the timing and amount of the goal. This allows us to compute what investments would make most sense, to minimize your monthly investment towards the goal.

Having said that, it is perfectly legitimate for you to not know the exact timing of a goal – for e.g. overall ‘wealth building’ is a goal. We use heuristics to determine the best allocations in such situations.

A couple of guiding principles enable us to determine the best products:

  1. The farther away the goal, the more risk you can take to try and earn a higher return. Conversely, a goal that is near requires investing in safe instruments
  2. Goals that are far away are affected by inflation – for e.g. it would be difficult for you to estimate what your toddler’s higher education would cost 15 years from today. We again use heuristics to estimate what the goal could look like in today’s terms (i.e. after adjusting for inflation)

We then help you invest one-time or monthly amounts towards this goal in the best instruments chosen. Our reporting then helps you monitor progress towards achieving the goal.

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Click Here to invest to build wealth and achieve your goals.

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