Saving towards a goal

Most individuals think that building a financial plan is a complex thing and that you have to seek an expert for this. But the truth is that you are the most knowledgeable person to execute a financial plan for yourself.

This is because it requires you to consider nuances of which only you are the best judge. For example, your needs, expectations, aspirations, level of savings, the estimation of how your career or income will progress as will your ability to invest. It is also important to understand your behaviour - whether you are in a hurry to spend all that you earn, or if you are focused on saving some part of what you earn. Then coming to your needs, some of them may be negotiable while some of them may not be. You may not be in a position to save despite having a high income if your circumstances don't permit this. All these inputs are the most critical part of a financial plan and only you or your family would know about them. No expert can help with that.

After looking at all these inputs, one should start with creating an emergency corpus. This is very critical. What if something happens, and you can't continue with the same job tomorrow morning? How much money would you need till the time you get another one? This is just one example. There could be any emergency. The size of a sufficient emergency corpus would vary from person to person depending on their circumstances. For instance, whether you have young kids or old parents at home, or whether you are single without any significant responsibilities. The money for emergencies can be invested in layers, from some money in your locker, to some in your bank account and then liquid funds, depending on your circumstances. As a thumb rule, an emergency corpus should be equivalent to at least six months of your expenses.

After your emergency fund comes health insurance. If you don't have health insurance, any investment or savings plan can easily get derailed. This will lead you to borrow money in case of any medical or other emergency.

Then comes buying life insurance, but only if you have financial dependents. If you don't have financial dependents, and if tomorrow you are not around, your family may face problems of other types, but not of a financial nature. The moment you have dependents, you need to have a large cover. It should be sufficient to take care of your family and your liabilities in your absence.

Your need for insurance goes up dramatically in the initial phase of your life. This is because you have dependent children and a home loan in many cases. You are also low on net worth during this phase. But as your investments go up or repayment of loans takes place, the need for a huge life cover comes down. So keep revising it to begin with. It costs very little to buy a term plan for your life insurance need.

Once you are done with all three - emergency corpus, health insurance and life insurance, you may move to the investment part which will depend on what financial goals you have.

Financial goals could be different things for different people. Planning for retirement is the most important thing. Having enough for your child's education is the second most important goal which everyone tries for. And then it could be a variety of things like buying a car, etc. Broadly, you can say that goals are divided as long term, short term and immediate.

For long-term investments, use your 80C limit by investing in a tax-saving fund and invest the rest of the money in a multicap fund, once you have a little experience. But before investing in a multicap fund, get started with an aggressive hybrid fund because experiencing equity is critical for you to have a long-term belief in it. It is also important to choose the SIP route.

If you get started with a racy fund and invest a lump sum, the moment the market falls and you see a big decline, you will panic and get out of it. This will be devastating for your long-term wealth and will also deprive you of a big opportunity.

Besides, the critical thing is to increase your investment over time. Most people think in constant terms. They invest a fixed sum of money every month, say Rs 10,000, and feel happy about it - that they are disciplined enough. But when you are doing it over a period of seven to 10 years or longer, you don't really connect it to your income. Ten years ago, you were able to save Rs 10,000, and today your income has gone up four times, but you are still saving that Rs 10,000 only. Your circumstances also change. In the initial years, you may not have enough savings, but in subsequent years you might be able to earn and save more. It is important to invest as much as possible with rising income because you don't know how long your post-retirement years will be. Assuming that you plan to live till 70 and are retiring at 60, you have to provide for 10 years. But what if you live for 80 or 90 years? So it is important to increase your investments over time with the rise in your income.

For immediate needs, depending on your circumstances, you can decide to keep some amount in your cupboard locker, some in your bank account which is easily accessible through ATMs, and then may some in a liquid fund.

Another aspect to consider is the negotiability of the goal. Suppose you are investing to buy a car in six months time. You may even buy it in a year's time, instead of six months. It's negotiable and won't make a big difference. But for something like the admission of your kid to school, it has to happen that particular day. It's non-negotiable.

For non-negotiable goals which are due in less than five years, you may consider ultra-short or short duration funds. If it is a negotiable goal, you may take a conservative chance on equity. Consider going with an Equity Savings fund in such a scenario.