After every lecture on financial planning, I get many requests for information from, young people just starting out in life. Regardless of their age, people do realize that a little upfront planning and action can put them ahead of the game. Therefore, here is what I would call a lesson 101 for you to do something. For those parents who have approached me with “how do I teach my children financial responsibility” kind of questions please pass it on to them!
Let us start at the very beginning…a very good place to start
The first steps have to be A, B, C or Do Re Mi…..if that sounds better!
Set your goals. So what are the steps?
1. Think where you want to be in five years:
How much will you have invested? Will you own a home? Where? What size? Will you have kids who will go to college someday? What kind of car do you see yourself driving? Will you take time off from work to study? To have a baby? To pursue a different career? What else is important to you financially?
2. Think about the roadblocks and the potholes along the way:
you do not want to fall, do you? Write down your financial worries. Being late on credit card payments, delaying the student loan repayment, borrowing from your parents (anybody), increasing housing EMIs, ..could be endless, so please be truthful. Make a list of your financial worries
Set Your Goals, NOW!
Let us put some numbers and dates in place to see if it helps to explain what I have said. Use this timeline to sketch out what you hope to accomplish year by year:
Saving Goals by Time Horizon
Goals for 2018:
Goals for 2019:
Goals for 2020:
Goals for 2021:
Goals for 2022:
It is your life and you need to make the choices – in this case Jointly.
You can see from the example that in order to meet your financial objectives, you have to have some discretionary cash to put aside. The only way to do that is to take a close look at the money coming in and the money going out. You should also make sure to budget money to invest. Ideally, that will be about 10% of take-home pay. Otherwise, you may need to work up to that goal over a couple years.
Set Aside an Emergency Fund
Your first investment goal should be to set up an emergency fund–money you can tap in case you lose your job or are hit with an emergency bill, such as medical expenses. I cannot emphasize enough how important it is to set aside some emergency cash: It gives you peace of mind, and it gives you a cushion so you do not fall into a vicious cycle with credit card debt. Typically, you will need enough in your emergency fund to cover three to six months’ worth of living expenses. This money should be invested in a money market or savings account.
Start Building Your Core Portfolio
Once you have taken care of the emergency fund, it is time to choose the building blocks for your portfolio. This does not have to be difficult. Index funds–either conventional funds or exchange-traded funds–fit the bill nicely. An index fund buys enough stocks or bonds to mimic the benchmark it covers. An exchange-traded fund is an index fund that trades like a stock. With regular mutual funds, (that is what an index fund is), all movement in and out of the fund happens at the end of a day.
If you are going to be adding to your investments monthly, use a conventional mutual fund Systematic Investment Plan. If you are in your 20s or 30s and are investing money for the long term (you do not plan to touch it for at a long time), you can use an allocation something like this:
• 10% Money market mutual fund (emergency reserves being built up)
• 25% Unit linked life insurance plan – for 40 years and willing to pay premia for longish period of say 30 years plus. This should be in funds with very low asset management charges – sub 1% if possible. It does not matter if the upfront load is high.
· 65% – SIP in a multi-cap mutual fund as an SIP route. This should be in a flexi- cap fund (also called Dynamic asset allocation)
Regardless of which fund or Unit linked plan you use, make sure the expense ratio is low.
For example: try not to pay more than 0.9% for a unit-linked plan and 2% in a managed mutual fund. Expenses hurt! Check the costs of a fund!
To start your life with a good financial base, you need to understand your assets and liabilities (net worth), set priorities for your goals, create a realistic spending plan, set up an emergency fund, and put the core pieces of your investment plan in place.
If you have been academically successful, socially successful, you surely can be financially successful. To start, you need not be successful, but to be successful you need to start!
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