Although getting someone in their 20s to plan for their retirement is wishful thinking, if they do invest and save for retirement, the corpus will be substantially higher than if they start in their 30s.
The early bird catches the worm
You have landed a dream job! PARTY time! If only life were this simple, after a few months of splurging, you realise that you need to start saving money for various things -- a new phone, car, marriage, foreign travel, etc. This is simple if you follow a few steps, and keep expenses under control.
The most important thing to do is prepare a Budget. A budget keeps your spending under control and ensures that monthly expenses do not overshoot your monthly income. Preparing a budget is the first and the most important step to be followed by any individual who wishes to manage his/her finances. It is very important to understand and monitor one's cash flows, i.e. from where the cash comes in and where it gets expended. With regards to income one should also be sure of how long that particular income stream will last.
Prepare a budget based on past expenses and predicting the probable future income. Also it is very important to factor in inflation into the budget. If your income exceeds your expenses on a consistent basis, then your financial plan is working for you -- else it is time to revisit the plan.
Next step is to prepare a financial plan and for this you need to chart out your goals, such as buying a house, marriage, etc. Then split these into short, medium and long term goals.
A good financial plan lists down the long term and short term goals of a person, and this differentiation helps one to understand and predict the future expenditures better. This also enables one to figure out how to plan finances in various time periods. One should review their goals every year and check whether these have been achieved and if not how to change the plan to achieve these goals.
Some goals could have an emergency fund for unexpected expenses, or for a child's education, marriage, etc. A person should also plan and keep a check on the funds required post-retirement. Retirement is one of the only times in life when expenses go up but the income stops.
The foundation of financial success lies in good investments. There are various avenues of investing one's hard earned money -- be it stocks, mutual funds, real estate, debt, or even in art. Irrespective of the type of investment, one should try investing in the best option for them -- as better (tax efficient) returns will lead to more wealth in the future. Following a budget will help in ensuring regular savings and investments. Ideally, one should invest regularly from an early age to benefit from the power of compounding.
An ideal way to start investments is in mutual funds. Mutual funds offer a very unique and regular mode of investments: Systematic Investment Plan (SIP). Through SIP one can start investing even with a minimum amount of Rs 1000 per month. Investing through SIP is beneficial in the long run, as the investments are done regularly every month; over a period of time the Average Purchase Cost reduces (Rupee Cost Averaging) which ultimately helps to clock in Higher Risk Adjusted Returns. Also long term investment in equity is tax free, so one not only benefits from higher capital gains, but the same is exempt from tax.
It is highly advisable to start saving for retirement early in one's career -- this will give you the advantage of additional years of investing and you can benefit from the magic of compounding. Although getting someone in their 20s to plan for their retirement is wishful thinking, if they do invest and save for retirement, the corpus will be substantially higher than if they start in their 30s.
An important aspect of building wealth is tax planning. One should consult a tax expert to see the best investment and savings avenues through which one can save taxes. One should also always ensure that the financial plan does not remain stagnant and the networth keeps growing. Networth is the measure of financial health (i.e. total assets less total liabilities). One should ensure that their financial plan is up to date, and based on their financial goals -- this will ensure a growing networth.
Summary:
- Make a monthly budget and a cash flow
- Create a financial plan based on your goals and risk profile
- Figure out the right asset mix and investment avenues
- Take adequate risk cover for life
Anil Rego is the founder and CEO of Right Horizons, an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.
