Do you have a retirement plan in place?
In my previous article (https://finfacts.substack.com/p/miracle-of-compounding), I had discussed how compounding can grow your portfolio manifold. The thought of having, say Rs. 50 million (Rs. 5 crore) at the time of retirement is an amazing thought. But how to build this corpus and what sort of planning is required is the most difficult one. What is required is some financial planning to achieve the desired goal. This planning can be done as a step-by-step approach.
Step 1: Identify the monthly spending:
These could be in the nature of Needs and Wants. Needs are the basic survival requirements of roti, kapda and makaan (Food, Clothing and Shelter) and Wants can be vacation, hobbies, shopping, etc. Whatever is over and above this, will be the savings. Say some one earns Rs. 100,000 per month and the total of needs and wants per month are Rs. 50,000. Then Rs. 50,000 per month is the savings. These savings can be used for investment purpose. But wait, there are some more steps to be thought through before we think about actual investments :-)
Step 2: Emergency Needs:
An emergency need could be anything like unanticipated / unforeseen requirements for funds like a medical situation or an accident or some other needs. To cater to such needs, an emergency fund needs to be created. A general thumb rule is to have about 6 months of monthly expenses as emergency funds. So say, for example if the monthly outgo is say Rs. 50,000, then Rs. 50,000*6 i.e. Rs. 300,000 will be the emergency funds corpus. These funds should be parked in ultra-safe options like a Bank Fixed Deposit or a Liquid Fund of a Mutual Fund or simply in savings account which is available on as is need basis.
Step 3: Insurance:
During this age of uncertainty like the pandemic, having
a basic life insurance for the bread winner (in the nature of Term Insurance) and
health insurance for the entire family is a must.
A few weeks back I had written on “Health Insurance: A stitch in time saves nine!” (https://finfacts.substack.com/p/health-insurance-a-stitch-in-time). These should be kept in mind while buying a health insurance.
For life insurance, atleast 10 -15 times your annual earnings term cover should be bought. Say, if the annual earnings (post tax) is Rs. 10,00,000 (Rs. 1 million), then the sum assured of the term life policy should be atleast Rs. 1 – 1.5 crore (Rs. 10-15 million).
Step 4: Liability Check:
It is always best to have minimal or no debt. However, it is not always possible to have a debt free life. Debt is taken to pay for future assets. Debt could be in the nature of Home Loans, Personal Loans, Car Loans or even a credit card payable (it is a liability as it is paid with future earnings). The lower the debt, the more peaceful sleep one can get.
Understand your liabilities and start paying them off, especially the higher interest ones like Personal Loans which can go as high as 20%+.
While some debt might still be okay but that needs to be weighed against all options. For say home loan, one can refer to the article on buy v/s rent and take a decision on such loans (https://finfacts.substack.com/p/buy-or-rent)
Step 5: Goals Setting:
After accounting for all the above steps, the next step is to set your goals (realistic). The above steps will provide an overview of the monthly / annual outflows and this will help in setting realistic goals. There could be various goals in terms of saving for your own marriage, saving for children’s education or their marriage, buying a home, etc. A value should be assigned to each goal and an overall future value of goals should be arrived at.
Step 6: Risk Profiling:
Obviously, investments cannot be done just on goal setting and the resultant final value required for investments. A proper risk profiling should be done before investing. A conservative investor who would not like to have much fluctuations in his / her portfolio, should not invest a large portion in equity (may be 10-15%) as equity returns can be volatile.
Hence, not just goals but “realistic” goals should be set and based on the risk profiling, devise an investment plan.
Step 7: Investment Plan:
The final step is to devise an investment plan based on all the above steps. There are various investment options which are available be it in Debt, Equity, Alternate Investments like Real Estate or Private Equity. These investment options should be discussed with your financial advisor before investing to make an informed decision.
FinFact: At the start of 2020, there were only about 1,400 Registered Investment Advisors (RIA’s). At the same time, there were more than 100,000 mutual fund distributors. Though the number of RIA’s are small, they are growing as SEBI is tightening norms for providing investment advisory to clients.
A disciplined approach is required to build a “future proof” or “retirement” portfolio. It does matter when one starts building an investment portfolio (the earlier the better to earn compounding returns), but it is never too late. So why wait, and start planning for your future!
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