They say start thinking about your retirement from your 20s. Trust us, we know that it's easier said than done. But it's possible if we start from the basics. In this article, we’ll try our best to lay out a journey for you which might help you clear your mind and achieve financial milestones.
Know your goals
Let's start by listing down your financial goals. It is very subjective, meaning that it depends on the age you’re at. If you’re in your 20s, your goals would revolve around completing your education, paying off education loans, planning marriage etc. and if you’re in your 40s, you would probably be tired of your 9 to 5 job and planning an early retirement. Family, parents, everything else comes in between. So it becomes extremely crucial for you to know your goals. Here are 2 pointers to keep in mind.
Pre plan your big expenses: Irrespective of the age you’re at, you should plan your expenses in advance. For example, if you’re planning to buy an expensive electronic item in 6 months or so, you should start saving for it right away so that it doesn't come out as a burden on you. No cost EMIs or taking loans for unnecessities might get you stuck in a vicious cycle of never ending installments.
Save for emergency funds: Problems can knock at your gate anytime, anywhere and you might not be mentally prepared for the same, but finances should be the least of your problems when it happens. You should keep some money aside for emergency funds. Some common examples include car repairs, medical emergencies, etc. You should make consistent contributions to this fund.
Do you know that only 27% of adults in India fulfill the RBIs' criteria of being financially literate? This is evident from the fact that the unclaimed amount of policyholders stood at Rs. 24000 crore in December 2020. Many times people are too shy to consult a financial advisor and end up getting scammed by fake policy issuers and even relatives for instance. So to be able to make basic financial decisions, you should at least be aware of basics. Here is a short list to give you an idea.
Cheat sheets like 50/30/20 budget rules: These types of financial rules are all over the internet but you should not get confused. Hold on to one and it’ll help you in improving your saving habits. The most famous is 50/30/20 rule which says that 50% of your income should go to needs, 30% should go to wants like going out with friends, spending on yourself and 20% should be saved.
Knowing credit scores: If you are a regular user of a credit card, you should ensure that you’re not swiping that piece of plastic mindlessly. Checking your credit history and credit scores regularly can help you assess your credit positions better. A good credit score starts at 670+. Credit score can help you get easy and best credits.
How inflation impacts your money: You must have heard a lot about high inflation, increasing interest rates, etc. But you should be aware of how these terms impact you as an individual. Try to educate yourself about these basic economic terms. Increasing inflation reduces your purchasing power and increasing interest rates make borrowings expensive. Hence, if your money is lying in one corner of the cupboard, it is losing to inflation. Investing wisely, which is our next point, becomes extremely important here.
Start your investment journey
By now, you must have realised that making long-term investments that beat inflation can help you achieve your financial goals better. But before you begin, here are a few things you should know.
Know the asset classes: You should keep your options open. There are an ample amount of investment options available. These are Fixed Deposits, Gold, Stocks, Debt, Mutual Funds, Index Funds, Bonds, etc. Returns and risks of each vary. Risk and return are directly proportional. Higher the risk, higher the returns. Equities for instance are said to be more volatile but they can also reward you with higher returns.
Know your willingness and ability to take risk: Once you’ve learnt about all the asset classes and their risk and reward, analyse your willingness and ability to take risk. Try to find a middle ground between the two. After this, it’ll be clear for you which investment instruments suit you the best. For example, if you’re in your 20s earning stable income, your risk ability might be higher than a 50 year old who is planning for retirement.
Diversification: It's a cliche but a true phrase that says, “DO NOT PUT ALL YOUR EGGS IN ONE BASKET. ” Diversify as much as you can. Have assets that have low correlation. For example, gold is negatively correlated with equities. Meaning, when equities perform , gold does not and vice versa. So you should keep a balance between all.
Make smart decisions; there are no shortcuts: As we have said before, there shouldn't be any shortcuts. No investment is going to double your money in 10 days. Stay consistent, stay patient. Do not try to time the markets. Always see the bigger picture i.e., your long term goal. For example, a sale on Iphones might lure you into buying one but if you’re planning on going on a family vacation soon, this expense might hinder that. So make wise choices.
Last but not the least is to keep a track of your expenses and investments. Regularly monitor your portfolio and what’s going on in the markets. Keep your options open and avoid herd mentality. Do not invest in something just because your friends are doing so, because what suits them might not suit you. If you do not have enough time to do all this, do not hesitate to approach a financial advisor. Call the experts and understand your needs. Experts like Green Portfolio help you achieve your goals so that you don’t have to worry about markets, economy or your portfolio.
Divam Sharma is smallcase manager & co founder, Green Portfolio