Managing your personal finance as a subject is not taught in schools ever, but is something which every individual has to deal with immaterial of their income structure. One doesn’t have to be a financial genius to manage their funds wisely. Only a few basic changes need to be implemented to handle your finances well.
To start with, one needs to chart down all the expenses versus income in an excel sheet. It needs to include all the money you owe on credit cards, home loans, student loans and other types of debt.
To calculate well, write down every rupee you spend out of pocket for an entire month. Consider it as keeping a personal money-management diary. In this you’ll be writing down every out-of-pocket expense from new clothes to dinner dates. Also, feed in your fixed expenses which includes things like rent and car payments. Post one month, categorize all the spending into broad categories such as groceries, transportation and housing to name a few. Bingo! You just performed a cost analysis.
As a standard rule for savings, one should keep aside 30% of their income.
Ideally, all the savings need to be divided in the below mentioned components depending on one’s requirement and priority.
- Insurance
- Equity markets
- Fixed incomes
Insurance
While insurance is a priority, one needs to buy it from a risk perspective instead of a savings instrument. There are two basic types of life insurances available: Term plan and endowment plan. Term insurance, as the prefix suggests, is for a specific period of time having least possible premium as compared to all the other life insurance plans. Since the plan has no money back assurance, one can select the length of the term for which one wants the coverage right from a year to 35 years. One can check their eligibility and premium amount by visiting any of the insurance calculators available online.
An endowment policy is a life insurance contract designed to pay a lump sum after a specified term (on its ‘maturity’) or on death of the insured. Instead of an endowment plan, one should go for a term cover; the difference money saved on monthly basis should be put in mutual funds through the SIP route into Equity mutual funds and match them to the periodicity of the premium one pays for insurance. Endowment plan invests in fixed income instruments which in turn is a 20-30 year old product and thus locks the money for the said period.
Equity
Prudent advice for small to medium sized investors would be to invest into equity markets through the mutual funds route. Since rupee cost averaging is one of the better ways of investing, we recommend Systematic Investment Plan (SIP). SIPs are most suited for the small investor who can afford to set aside small amounts, as little as Rs 1000 every month, over a long period.
In one’s busy schedule, investing in something as complex as share markets is the last thing on people’s minds. Share markets give jitters to most of the financially naïve individuals. Thanks to the previous generation which has terrorized the young minds to fear the volatile share markets. What one doesn’t realize is the power of money compounding and the advantage of rupee cost averaging.
If invested in the equity market, it gives a return of more than 20% upwards of 6 years on a year-on-year basis which when cumulated could give big numbers.
Fixed Income Investments
Fixed income investment pertain to your investment in mutual funds which invest in debt of sovereign / AAA / AA rated debt. This route will fetch around 8-10% of returns on your savings.
Ideally you could invest into bond fund or a liquid income plan. Liquid funds give you returns of 7% while bond funds give up to 8% while offering you facility of withdrawal without any premium charges. If using the above, the fixed income plans can be used to take care if your emergency funds
To conclude, one has to save because nobody can predict the future. If someone could, they would know precisely how much money one requires for all their future wants and needs, let alone the emergency situations that wait for none
The article is written & contributed by Mr. Pratapsingh Nathani, Founder & MD of LoanXpress
