How to Manage Your Money

Well, let's start with an analysis as to how much money is actually required for investment.

Before going ahead, I want you to roughly calculate a few things.

What is your monthly spending on basic necessities like house rent, food, transportation etc? Let this be - 'x'.

Multiply it ('x') by 12. Let this number be - 'y'.

Multiply it ('y') with 25. Let this number be - 'z'.

Now this is the figure ('z') which you need to invest for you to have financial freedom in your life. 

Let's take an example-

Monthly expenditure on basic needs- Rs 20,000.

Yearly requirement - Rs 2,40,000 (20000 X 12 = 240000).

Lifetime requirement - Rs 60 Lakhs (2,40,000 X 25 = 60,00,000). 

So, basically you need Rs 60 Lakh invested for your basic necessities. Remember, we are talking about basic necessities only.

You need to now calculate as to what is your monthly saving for investment and how much time it's going to take to reach Rs 60 lakh.

Say you save Rs 30,000 a month then it will about 16.5 yrs to have a corpus of Rs 60 Lakh invested. Well that is simple maths.

That was all to know your financial standing. We now move on to that part of the article wherein we tell you how to plan your finances.

How should you invest ?

No matter if you are young and recently started your career or you are in your middle age, if you don’t have a financial plan in place, you are definitely going to have tough times ahead. Therefore, you should have a proper financial plan in place without any delay. It gives you better control over your finances.

There isn’t a readymade formula or a 'one-size fits all' kind of plan. It will vary for each individual as circumstances are different for all. Still, some of the basic steps can be common to all and can give a head start unless one wants to build a plan more professionally through a financial planner.

Begin by identifying your short-medium-long term goals. Once identified, give them a value and the number of years to achieve them. For example, sending your child to a good institution is not a goal unless one says, “a good institution or a course after 16 years which would cost me Rs 18 lakh at today’s cost.” Similarly, write down each of your goals with figures to back them up. This brings clarity to the goals that your wish to achieve.The goal that you wish to achieve is tagged to today’s cost. Inflation will make it costlier. So, calculate the inflation-adjusted cost of the goal and prepare an investment plan to save towards it. Do not start saving unless you know the actual amount required to avoid under-investing.The choice of asset class will be important to achieve various goals based on their tenure. Choose equity-related products such as diversified large and mid-cap equity mutual funds towards goals that are at least 5 years away. For goals with lesser tenure, balanced funds and income funds can be used.

Illustratively, let’s say parents have identified a goal to send their 7-year child for a postgraduate course when the child is 22 which costs Rs 18 lakh at today’s cost. Now, if the parent starts savings towards Rs 18 lakh, and assuming they can generate a return of 12 percent per annum, they will need to save Rs 3,600 each month for 15 years. However, postinflation, the cost of the course could balloon up to Rs 50 lakh assuming inflation of 7 percent per annum. In practice, they should have saved Rs 10,000 to achieve the goal. The approach of ‘income minus savings equals expense’ should help you in achieving it.

Create an emergency fund, it’s time to look at other avenues where competitive interest rates can be availed of without compromising on the liquidity of such funds that are primarily used for emergency needs. For better management, one may keep half of the fund requirement in a sweep-in fixed deposit while another half can be put in shortterm or liquid mutual funds. Although, there’s no fixed rule as to how much of emergency cash one needs, as a thumb rule, three to six months’ household expenses can be one’s emergency fund. The amount should give you the confidence to combat financial emergencies in your household.

Start getting rid of debt

In case you are rolling over the credit card dues, plan to get rid of it as early as possible. Not paying dues on unconstructive debt such as credit card on time not only amounts to a high-interest rate of about 36 percent per annum but you also lose out on the interest-free period of about 45-51 days on fresh purchases. Avoid schemes like balance transfer and converting to EMI as they all come at a cost. Use credit cards but ensure you pay off on the due date.

Review and diversify the portfolio

Although equity-based investing is meant for the long term, intermittent reviewing of the fund’s performance could result in optimum portfolio returns.In 2022, equity funds have not delivered desired returns. While looking at the fund performance, do not be led by the fund’s return in isolation. Compare the scheme’s return against its benchmark return. A scheme not being able to beat its benchmark on a consistent basis need not be in one’s portfolio. If there are consistent underperformers, replace them with front runners after carefully evaluating the new ones. Importantly, to identify under and performers keep a longer time horizon, and evaluate over a 3-5-7-10 year basis.In addition, one may also consider evaluating the ‘category average returns’. Even if the scheme has outperformed the benchmark by a decent margin, there could be better performers in the peer group. A look at the category average returns will tell you how good or bad is your MF scheme’s performance against its peers.

Initiate goal-based SIP

SIPs have sort of become a generic word for investing. Do a goal-based investing and stick to 5-7 schemes by investing in them through SIP and importantly link it to a specific goal, say for a child’s education. Importantly, make sure you have diversified across market caps and sectors through SIPs. And once you have initiated SIPs, avoid the temptation to redeem them to meet short-term household needs or due to market volatility. With three years away from the goal, start shifting funds from equity MFs to less volatile debt funds to preserve the corpus.

Plan and start saving for retirement

Retirement, probably, would be the last thing in the mind of youngsters. But if you were to ask a middle-aged individual or one nearing retirement, he would probably tell you that early retirement planning could have helped them tremendously. If you start saving early, the money required to save for retirement will be much less than the amount you will need to save if you start (saving) at a later age.Many youngsters, even if they have started saving for the long term, may not have estimated their inflation-adjusted retirement corpus. Assuming a 5 per cent inflation rate, a Rs. 50,000 monthly household budget balloons to Rs 1.7 lakh a month, nearly 3.5 times! One, therefore, needs to save towards the latter and not look at current costs. Inflation brings down the purchasing power of the currency. If one seems comfortable with a crore of a corpus, let’s look at its worth or the purchasing power after 15 years at 5 per cent inflation rate: Rs 1 crore will fetch you goods and services worth only about Rs 48 lakh! If you haven’t started, create a retirement portfolio in 2023, after properly estimating your post-retirement needs. The second inning of your life needs support from your current earnings.Opinions expressed in the articles are of the authors and do not necessarily reflect those of editors or publishers. While the editors do their utmost to verify the information published, they do not accept responsibility for its accuracy. Please consult with your financial advisor before investing.