While meeting a number of people over a decade I came to understand few common errors made by them while they were young & earning without much liability. Later most of them realize & regret why they haven’t started investing early. As you know the longer we stay invested, the greater is the power of compounding.
This small note is a guidance of doing things in the right way at early stages of your carrier, in order to be financially sound/fit for uncertain future.
Article Suitability :
- Young Employed
- Young Married Couple
- Married Couple with Young Child/Children
If you have just started your career, you will find these tips invaluable. But mind you, these smart financial moves will lay a solid foundation for a prosperous tomorrow.
Can you trust your investment/financial advisor? It is very important to have a trustworthy source of investment advisory. So, get a professional to make a financial plan for you. Objective financial advice isn’t free, but works out cheaper than the ‘free’ advice doled out by bank executives and so-called wealth managers of brokerage houses. If you buy a costly insurance plan that you don’t need or a mutual fund that does badly, you will lose much more than the annual fee of a financial planner.
How can you differentiate between an advisor and a salesman? The former will try to understand your needs and suggest a strategy to achieve the goals after assessing your risk appetite and saving potential. The process may take days, even weeks. A salesman will hurried to the last stage and quickly offer you an insurance policy/mutual fund eyeing & fulfiling his target as the ultimate goal rather than considering value creation for you in most cases.
One should buy a term insurance plan ASAP. Usually, the younger you are, the healthier you are. As you get older, however, you are at greater risk of contracting illnesses which in turn increases your premium or in some cases if illness is critical you may be denied Term Insurance. Moreover, the earlier you buy a term insurance plan, the lower is the premium.
Please see the below Tabular Representation of Total premium paid for a life cover of 1Crore upto the age of 65 years:
Keep few things in mind while buying a term plan:
Firstly, the insurance cover should be big enough to generate a decent monthly income for your family, cover major outflows/expenses, and settle any outstanding loans.
Secondly, the policy should cover you at least till the age of 60-65. Don’t take a short-term cover of 10-15 years, which ends when you are in your 40s or mid 50s. You need insurance most at this stage of life and a fresh policy will cost you a bomb. Lastly, don’t try to lower the premium by mis-stating facts in the form. If you smoke, drink or suffer from a medical condition, don’t hide it. It may bump up the premium by a few hundred rupees, but your nominee’s claim won’t be rejected.
It’s highly important to get into the habit of savings & even more important to park the hard earned money monthly into Systematic Investment Plan (S.I.P.). If you are young there is no second thought in investing a handsome portion of your saving in Equity Mutual Funds every month. While you buy some units costly as markets are high & more units at low levels when markets slips down , your cost of purchase average out in long run . With India growing & leading towards development over longer tenures it’s a very safe investment to be a part of Indian equity market through Mutual Fund Route.
The Past performance are no guarantee of future returns, but still gives us a fair idea of the capability of generating returns of this asset class.(From 1996-2016 if you have invested Rs.1000 in SIP it would have become 40 Lakhs+ while your actual capital employed would have been only 2.40 Lakhs, a staggering return of 21.68% p.a.). This data was used just to show the power of this asset class & in no way depicts the likelihood of future returns.
Health insurance is also cheap when you are young and costlier when you are old. More importantly, the rule about pre-existing diseases makes a compelling case for buying a cover early. When you are young and fit, the 2-4 year waiting period passes just like wind. Delay in buying the policy and you may get afflicted by medical conditions that usually crop up in the late 30s and 40s.
Many will give argument that they are covered by their employer under Group Mediclaim Policy & even their dependents are enrolled too. Evaluate your employer’s group health plan if it suffice your requirement & cover you on maximum parameters the it’s ok else take a separate plan .Besides, if you lose your job or switch to another company or start your own venture, you may be rendered uninsured for a certain period. To avoid such situation it’s always better to shell few thousand & take a Individual or family floater plan so as to avoid any cover-less period.
The Public Provident Fund is the most tax-efficient debt option in the market today. The investment gets you tax deduction under Section 80C. The interest it earns every year is tax-free, and so are the withdrawals. It has a 15-year lock-in period, which makes it an ideal tool for long-term goals such as retirement. You can invest a maximum Rs 1.5 lakh in a financial year. There is also a minimum investment of at least Rs 500 in a year.
PPF has undergone changes in recent years. One, the interest is no longer fixed and is linked to the bond yield in the secondary market. The rate doesn’t change on a day-today basis, but is announced every year in April, based on the average bond yield in the previous year.
Another big change is that agents will no longer get a commission for opening a PPF account. The good news is that some banks, such as ICICI Bank and SBI, allow online investments in the PPF.
The most common excuses for not investing is, “I don’t have the time.” Days become weeks and weeks turn into months.
Routing investment online will provide agility with speed & hence remove the roadblock of not investing early or abolish excuses of not investing. For instance, you could start an SIP in a mutual fund and give an ECS mandate to your bank. On a designated day of the month, the money will be invested automatically.
Saving time and effort is just one of the many benefits of automating your investments. It also takes emotions out of investing and enforces a discipline an investor may lack. If the money has been earmarked for investment and is debited from your account, you will not use it for any other purpose.
Factor in all your monthly expense in an excel/ diary/ through software. This will help you in keeping a check on unnecessary expense stuff, that can be curtailed to save more bucks or to add to your kitty of investment/savings.
Studies reveal that discretionary spending can be as high as 18-20% of the income for young people. That’s quite a large chunk and could impinge on other, more crucial, long-term goals.
It’s always good to be prepared for an emergency. This is why planners like us insist that you should keep away some money that can be accessed at short notice. The contingency fund will come in handy if you are faced with unforeseen expenses, such as a medical emergency or losing your job. The size of this fund depends on your financial situation. Ordinarily, financial planners suggest that their clients put away at least 3-6 months’ living expenses for this purpose. However, if your job is secure and you have enough savings, you can make do with even 1-2 months’ expenses. This in turn will help you in avoiding fund withdrawals from other long term investment made by you.