This week, lets step aside and take a look at the purpose of investments and financial planning. I always like to say we work for our money but does the money work for us?
People get up every morning, go to work and come back in the evening. Now, what is the purpose of doing this day in and day out? It could be job satisfaction, work as a hobby but the primary purpose of going to work is to earn money.
The idea of setting financial goals is like setting milestones to take us through the journey called life. People work so that they can have a comfortable retirement. ow, what is the definition of a comfortable retirement? It means doing what we want without having to think about where the money will come from.
The only way of doing this is by starting to save from day 1 when you start working and letting the magic of compounding to do its bit. For example Rs 1 lakh saved after 30 years at a rate of 8 pc becomes about 10 lakhs. Now, for 5 lakhs to become 10 lakhs at the same rate of interest of 8 pc would take 10 years. Starting to save early, is just the first part of journey towards financial independence.
Next is to set goals. Goals as in by the age of x I would like to have saved y amount of money. Only, when we have goals i front of us can we save money towards. Now, buying a car, going on a vacation are not financial goals. These goals are minor goals which we need to have to live life towards the fullest but not the primary goals.
Once we have decided how much amount we want to have saved by x age is to go about achieving it. This could be achieved through a mix of real estate, gold, equity and debt instruments. The thumb rule for this is 100 - your age = investments in risky asset classes like equity. For example, a person who is 35 years old can have up to 65 pc of his investments in equity.
A safe mix is usually having Debt instruments of about 50 pc ad rest in equity, gold and real estate asset classes.
Now, a person has started investing early, has his goals in place, the next step is to keep monitoring them. This could be at pre-defined intervals of say 3 months and bring in course corrections as and when required.
Next time, we could look at proper asset allocation. The pros and cons of each asset in asset allocation.
To sum up,
1. Start investing early and let compounding do its tricks
2. Set goals in life, by which age you want to save up how much
3. Do proper asset allocation
4. Keep monitoring regularly.
By following this simple 4 point program, you are on your way towards financial independence.