Tenets for financial solvency
Who would not want a comfortable life? We all aspire for it. But some are able to work towards achieving it while others falter inspite of earning very well. Such people often wonder those who financially did better than them and stole a march over them, even though they stood a good chance to do the same themselves.
A good example is Parth Singh. His good friend Amar Kumar, who was not exactly a high flier in terms of position and income in front of Singh, ended up with an enviable corpus for post-retirement life. While Singh, who earned twice as much as Kumar was worried about managing his expenses once he retires. Singh just could not understand how Kumar managed it.
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Singh wanted to know the secret and Kumar was more than willing to oblige. Kumar’s secret were five tenets, which he followed to stay financially solvent. For the likes of Singh, here they are -
Invest first, spend later
Kumar followed this rule since the start of his career. He had always earmarked a portion of his income for investment. Initially, it was 10 per cent of his take home pay as the income level was low. He increased it to 15, 20, 30, up to 40 per cent of his income, gradually. He was disciplined and did not wait for a chance to do the same. As soon as he got his salary, he would set aside this money and only then spend. This way he wasn’t guilty of spending and did not compromise for his future needs.
Be disciplined about investments
While putting aside some money every month is important, it needs to be invested in appropriate instruments and diligently. The easiest way, Kumar thought, was to invest every month. He started investing in mutual fund schemes through Systematic Investment Plans ( SIPs) and opened recurring deposits accounts with banks. He had timed these investments with his salary. A day or two after the salary was credited, these deductions happened. As a result, this money did not exist for Kumar. He had started off with a modest monthly investment of Rs 1,000 for both SIP and recurring deposit, which had gone up to Rs 48,000 a month, closer to his retirement. His Employee Provident Fund (EPF) corpus and investment in Public Provident Fund (PPF) also contributed to his post-retirement kitty. But, through his employment years, Kumar had never once dipped into this fund.
For other goals, Kumar had invested in various other instruments. Importantly, he always invested for the long-term. Kumar had also put some money in equities, which he had held for over 25 years and received bonus and rights shares, a significant source of income for him. He had also increased the number of stock he held over years.
Don’t chase fads
There are always some assets that will catch investors’ fancy. At one time, it was teak plantation and goat farming. At other times, it was owning farmland and last year it was gold.
Kumar always believed in investing across asset classes and in a diversified portfolio’s power to deliver better results. Each asset class performs at some point. One has to wait for the same to make money. There would always be great temptation to jump from one performing asset to another. Like many cashed out of equity last year to invest in gold. In 2007, investors transferred their assets to equity. A proper asset allocation, periodic review and rebalancing of portfolio are necessary before looking for returns.
Never stretch your limits
Kumar had a golden rule, keep your expenses few notches below what you can afford. If you can afford a Honda City, stick to i20. This will help you afford better things and running other expenses will not pose problems. Most people do the opposite. This puts pressure on finances and leads to many compromises.
Kumar always made a budget and recorded his expenses. He began with estimating his expenses correctly. To do that, you need to record all expenses you incur for a few months at a stretch. Making the family members adhere to the expense budget, is also important in keeping a check o the same. Kumar used to reward his family members if they stuck to their budgets. Like some jewellery for his wife and a trip to the amusement park for his children.
Keep cash in hand
Kumar always used to keep sufficient liquidity. He maintained about two months expenses in his bank account. Another two months expenses used to be in liquid funds for earning returns with liquidity. He also used to maintain a contingency fund of Rs 2.5 lakh to take care of unforeseen emergency, if any.
Also, he had sufficient medical cover for the family, which is very important today. Without it, your savings can get depleted, exposing you to an uncertain future. It can also jeopardise your goal(s). Since Kumar had realised this early on, his family was adequately covered and he never had to pay for the medical emergencies. Funds for this purpose used to be parked in bank fixed deposits.
On hearing this, Singh ruefully thought that it might have been so useful had he known this two decades back. But he had adopted a fancy lifestyle and overstretched his expenses. And today, he is looking to work for few more years. Two very different outcomes, just because of different treatment given to money at hand.
The writer is a certified financial planner