Most graduates get to hear about financial planning only when they get placed in their first jobs. Usually, it is the process that follows their formal induction into the organisation. The banks, mostly private institutions, open salary accounts within the bat of an eyelid and then slowly push a slew of their financial products to the unsuspecting people, usually starting with a ‘lifetime free’ credit card.
And, within no time, the newbie employee is sucked into a debt trap, the only way out of which would be to change jobs because salaries seldom grow at the pace of one’s aspirations (read materialistic wants). Nothing to complain about, if the said employee is also keeping aside some of the cash towards devising a plan for the future. Of course, it is best to know that listening to the bank may or may not result in the outcomes that they plan for. Because, your personal banker has a personal agenda – to cross-sell products and pocket the fees.
In this article, we discuss some points that can result in a healthy financial plan for a newly employed individual. Remember that most of us go through three phases in our financial planning, the first of which is to flash the credit card to fulfil every desire. Once we realise the potential of a debt trap here, we quickly swing over to the ‘safe’ options such as deposits in banks or the post office. The third stage is where we consider investing in gold or a flat – both of which comes with their own risks, about which we will discuss in another article.
The best way to start off the financial planning journey is to invest in a good comprehensive life insurance policy followed by an investment in a systemic investment plan (SIP) that induces income generation and tax savings. Having gotten started on the investment route, the next step is to ensure that we have a diversified portfolio when it comes to planning our personal finances over the medium-to-long term. Here are some pointers on how to do so:
Never place all your savings in a single option or even a select few. It is way too risky and diminishes the chances of getting best-possible returns. So, even in a bear phase, it is good to invest in blue-chip stock alongside other options such as debt or gold. Balance the risky, high-return investments, and finances locked in long-term investments with low-return, but low-risk and short-term investments that have high liquidity and can act as your emergency or backup funds
The core idea behind diversifying one’s portfolio is to minimise risk, though it would be wanton to suggest that financial planning can ever be foolproof. Market fluctuations are a part and parcel of life, so playing it overtly safe would only result in bare minimum returns from instruments such as PPF or NSCs and debt options. Consider your risk appetite and the inflation rate before diversification. The best bet is to put one portion in growth-oriented investments like mutual funds.
In case one is starting young, the best option would be to allocate a higher percentage of savings in high-return, high-risk equity-led plans. Of course, it is best that one gets into the circus with help from a facilitator (financial planner) at least till such time as one has learnt to swing the trapeze from one step to the other. Once there is additional responsibility in terms of a family, it is best to focus on creating funds in the form of a retirement corpus, an emergency fund and health fund. This is where one moves from a totally high-risk portfolio to one that balances the risk and yet manages a sound return over a longer duration.
For those who are averse to investing directly in stock, the next best option is to go for a mutual fund that is equity-led. However, before investing, one must spend time on understanding SIPs and related tools so that you know how well the fund manager is planning to distribute your investments. As a first step, prefer a fund that invests equally in debt and equity or is skewed in favor of the former. Keep going till you have time to study schemes where equity leads the show and then slowly diversify funds between these two so that you have covered the risk on two fronts and your rewards are still in the range of 15% per annum.
And finally, never get into the fill-it-shut-it-forget-it mode with your investments. To forget your savings till the time of maturity can get you into big trouble. Plan at least a quarterly revisit on all investments and assess them in juxtaposition of the market status, availability of new options or instruments as well as upcoming monetary needs and fund availability.
In the ultimate analysis, do remember that the world does not owe us a living. We have to make one for ourselves and the only way to do so is to have funds ready for that rainy day.