In economics, there is a concept called “Life Cycle Hypothesis”, which discusses that peopleplan their consumption and savings behaviour in the best possible manner over their entire lifetimes. In many ways, this theory explains why people incur high amounts of debt in their early years of earning an income despite lacking a strong financial backup. They do so because they anticipate a higher income at a later stage. This works very well for some people, but not for all. After all, if every individual followed theory faithfully, then the global debt crisis would not even have crept up at all.
The fact is this: Saving is extremely important for the well-being of the individual as well as for the economy as a whole. Some people save a lot of money as well, especially in India where the Financial Savings Ratio for 2011 was as high as 10.9% of the Gross Domestic Product. However, loads of people who “save” reasonable amounts of money in their working years also fail to build up a commendable corpus at the time of retirement or exigency because of their unplanned financial behaviour.
In order to save in a planned and systematic manner, one needs to “invest” money rather than simply save; this ensures that inflation does not eat into the savings. With inflation in India being close to 10-12% p.a. and savings bank accounts paying only 4% interest, a person actually ends up losing 8% of his wealth if he keeps the same in a bank account. The same amount can be invested intelligently and according to the person's risk appetite and financial requirements, thereby generating more money smartly.
Thus, planned investment is the key to a sound financial future. The key word here is “planned”. It means:
1) Considering one’s future goals
2) Taking into account one's expenses and liabilities
3) Ascertaining one's
- Risk Appetite
- Horizon for Investment
- Investment Objective
4) Deriving a plan for the same
5) And most importantly, sticking to this plan and reviewing it from time to time
It may sound difficult but it is not so difficult in reality. After all, we are talking about the most interesting thing in your life – YOUR FINANCES and YOUR MONEY! The charm of achieving such a goal makes the path seem simpler.
6 Basic Tips to keep in mind while making a Planned Investment
1. Create a Goal Sheet and Chalk out the Larger Objectives of Your Life: It may sound silly, but actually penning down larger financial objectives – like your daughter’s higher education at a foreign university in 20 years or your son’s international tennis tournament in 15 years, etc. – can prepare you to become disciplined enough to continue such investments over the long term. Your objectives may vary with time and life>
2. Make a Proper and Diligent Plan and Continue with It: The most important step for planned investment is conducting a cash flow analysis or preparing a financial plan either by yourself or through a professional, keeping the above mentioned factors in mind. Try to stick to your plan as much as possible without deviation so that the larger objectives of your investment are fulfilled.
3. Review the Plan Once, or at the maximum, twice a year: It is necessary to review your plan once or twice a year. But reviewing the same every day or every week will not serve any purpose. This is because the investment horizon of any investment tool is determined by the objective, and hence, should only be reviewed after a certain period has elapsed.
4. Have a Health Insurance Family Floater Plan: People often take their good health for granted and do not plan for rainy days. Hence, health insurance usually takes a back seat unless you feel the pinch of medical bills yourself. To plan for a sound financial future, it is important to maintain a healthy life>
Medical expenditure does not eat into your earnings
The flow of income does not stop for medical reasons
This is true for all members of a family, which is why a comprehensive family floater plan is recommended.
5. Build a Contingency Fund: You can do so in a savings bank account, a liquid mutual fund or some other similar tool. Such funds should be set aside for medical exigencies and other emergencies so that investments intended for the larger financial objectives are not eaten up during this cash crunch. Avoid touching this investment under any circumstance and plan effectively by taking emergencies into account
6. Educate your Nominee: Your nominee should know about all your investments and your will so that your family remains financially protected even if something unforeseen were to happen to you. By maintaining a healthy life>
Wish you a planned year of investment. Invest systematically and in a diligent manner and it will help you build a sound financial future.