Do you want to be wealthy?

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I have a monthly take-home of about Rs 19,000 and I've been working for about 10 months now. What are my options to start saving money for the future? I don't have any expenses as such -- I am still supported by my parents except for my own personal expenses -- so I would like to make a head start.

-- Leena

Congratulations, Leena.

Few people understand that the inclination to become financially well off is the single most important ingredient to becoming wealthy.

You have many, many options in which you can save and invest money. None of these options are bad or good in themselves. But your choice will certainly have implications on where you are today and where you want to be eventually, financially.

I will quote Lewis Carroll in Alice in Wonderland. When Alice follows the rabbit and falls in the hole, she is lost because the rabbit dissappears. Then a cat appears...

'Cheshire Puss,' she (Alice) began... 'Would you tell me, which way I ought to go from here?'

' That depends a good deal on where you want to get to', said the cat.

' I don't much care where...' said Alice.

'Then it doesn't matter which way you go,' said the cat.

When it comes to becoming wealthy, the power of dreaming is underestimated. In fact, it is often berated. But I will encourage you to dream how you want your future to be and what that would mean in financial terms. In technical terms, it is said 'laying down your financial goals.'

The next step is to lay down financial objectives. In simple words, you must put a time frame to your goals and also put an amount to that goal.

For example, you might be dreaming of nice racer bicycle (now you know what I dream of!) that costs, say, Rs 1 lakh today. Your financial objective, in this case, will be a bicycle at the end of one year for Rs.1.06 lakhs.

I have assumed the bicycle will get a little more expensive along with the general inflation. But this may not always be the case.

Take education for instance. Let's say you dream of doing a post graduation overseas. If you are considering doing this in a state university in the US, the present cost may be around Rs 15 lakhs for the first year. If I was planning something like this for myself, I would plan on the basis that I am going to work in the second year; as a result, I really am planning on spending for the first year only. I don't want to borrow. So my dream (read financial goal) translates into something like an MBA in UT Austin after six years at a cost of Rs 27 lakhs. The assumption here is about 10% inflation + currency devaluation.

This is only the beginning. But, remember, a job well begun is half done. A professional advisor (I always recommend consulting an advisor who charges you a fee) can take you through the rest of the steps.

The last step is selecting the investments.

Your options to invest, which is your main question, must be evaluated from the perspective of how well that option helps you accomplish your financial objective. Here is a list of some options you can consider:

Property
~ Low risk
~ Medium return expectation
~ Low liquidity
~ High transaction cost
~ Amount required for investment large
~ Seven to eight years time horizon

Mutual funds
These typically are fairly marketable(liquid in lay man's terms) and need small amounts to begin with. Here are some of the different kinds of mutual funds you can consider.

Equity Mutual Funds -- Sector Funds
~ Very high risk
~ Among the highest return expectations
~ Eight to 10 years time horizon

Equity Mutual Funds -- Diversified Funds
~ High risk
~ High return expectation (inflation + 6 - 8%)
~ Seven to 10 year time horizon

Government Securities Mutual Funds
~ Medium risk
~ Medium return expectation (inflation + 3 - 4%)
~ Three to five year time horizon

Corporate Bond Mutual Funds
~ Medium risk
~ Medium return expectation (inflation + 2 – 3%)

Floating rate funds and Liquid funds
~ Low risk
~ Low return expectation (inflation + 0.5-1%)
~ Any time horizon

NSS, RBI bonds, NSC
Small savings such as NSS, RBI bonds and NSC typically offer around 8% taxable interest for six years. Some of them offer tax benefits. They also have limits on who can invest and how much can be invested.

PPF
The Public Provident Fund presently offers 8% tax free interest. However, your investment needs to be made for a period of 15 years. There are tax benefits attached and limits on who can invest and how much can be invested. Your employer may also offer EPF.

Insurance (investment) products
These products typically have high expense ratios and, because they are bundled, lay people find it difficult to evaluate them. I would say tread cautiously here.

Gold
~ Low risk
~ Low returns (inflation)
~ Good hedge
~ Offers currency diversification in some way

You also have avenues for alternative investments such as art, collectibles and investing overseas. You could consider these at a stage when you are already comfortable with the basic alternatives.

Good luck!