Ten steps to reach your dream goal
Everyone follows different paths to reach their financial goals. While some prefer to invest in 'safe' assets others prefer riskier alternatives, and many believe in putting off larger expenses till their goals are met. No matter which method is used, there are some basic areas that need to be addressed to meet one's financial goals.
Define financial goals – Goals should not be vague such as retirement or a better home. It should be specific, say, "I need to save Rs 5 crore for my retirement" or "I want to buy an independent 3 bedroom house in XYZ area". The clearer the goals, the easier it is to plan and achieve them.
Create a financial plan - Review current investments, insurance, and other assets before making the plan. Decide on the investment avenues that will be used to achieve the goal. This will be based on your risk profile, age, earning capacity, tax bracket.
Risk tolerance - Do an assessment of the level of risk you are willing to take. Typically, higher risk assets yield higher returns and vice versa. If you are able to get a good night's sleep while investing in riskier assets, then equity-based products are a good option, else it is better to invest in safer debt-based investment products.
Make a budget - This is one of the most important steps towards achieving one's financial goals. A proper budget will help in ensuring that savings and investments are done regularly as well as keep unnecessary expenses and debt at bay. It is important to check the budget on a weekly and monthly basis to see if your expenses are within the budget or if they have gone over your income.
If you are in the green (income is greater than expenses) then your budget is working for you, but if you are in the red (with expenses more than income), then it is time to rationalise spending.
Automate Investments - It is advisable to invest on a monthly basis (through a systematic investment plan), as this will give one the double benefit of regular investment, or discipline in investments, and compounding. It will also negate the need to time the markets. Ideally, you should automate this process by a direct ECS transfer to avoid any last minute delays in investing.
Invest from an early age - Starting to invest early will give you the benefit of compounding. An additional few years will result in substantial difference in the value of the investment over a period of time. For example, if investor A starts investing Rs 50,000 per year at age 30 and investor B starts investing the same amount at age 35, when they both reach the age of 55, investor A has a corpus of Rs 61 lakh while investor B has only Rs 40 lakh (assuming both earned 8 per cent interest per annum). This shows that even a few years can make a substantial impact in the long run.
Diversify - Always seek to diversify portfolio, since one asset class could perform well, while others are posting low returns. Diversifying can help in reducing the risk in the portfolio, and give better returns over the long run. Ideally, your portfolio should be a mix of debt, equity, real estate, and commodities.
Time horizons - When making investments, time horizons need to be kept in mind. It is advisable not to invest money that is required for short term needs such as purchasing a car or digital camera, spending on a vacation, and such in equities as these are riskier in the short run.
Long term investment goals can be met with riskier assets, as over the long run equities are likely to give better returns.
Emergency fund - This is an important aspect of financial planning. You should always keep aside some money for emergencies in a liquid form (ideally in cash in a separate savings account). Ideally you should save four to six months' of living expenses in this account.
Review - It is crucial to regularly review the portfolio, as what is a good investment today might not be the best investment a year or two hence. You can either monitor and rebalance the portfolio on a yearly basis, or based on the values of various asset classes in the portfolio.
Best Regards
Prakash Nair
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