Where must your money be?

Where must your money be?

It’s the one thing that everybody in a household agrees upon-your spouse, mother and mother-in-law will never argue on your initiative to save money. Making a habit of saving is the first step to creating a stable personal financial plan. An early start ensures higher returns, so get started right away.

To state the very definition of saving, it is simply setting aside money that must not be spent in a month or a year. Saving instils a discipline that helps even the most impulsive shopaholic curb those splurge urges!

Tracking financial goals is of importance as it keeps aimless saving to a minimum. While you are allowed a few indulgences like the fancy car or a day at the spa, you need to have a structured saving plan that includes saving for a house, saving for your children’s higher education, and saving for retirement. It is equally important to understand your capacity for saving, that is, to know how much money you can afford to put aside. This will help in charting out an investment plan.

Sticking to tradition

Some of the most traditional investment options that people bank upon are real estate and gold. While current prices on the real estate market are steep, it is worthwhile to own a property with a clear title as you would have invested in something that has a very good chance of appreciating in value. The latest trend amongst young investors is to buy a plot of land in the outskirts of the city. As the city’s boundaries are constantly being redefined, this strategy is a certain winner.

As people, Indians have a cultural obsession for gold. Besides being bought as jewellery, gold in the form of coins or bars is considered a sound investment. The recent advent of Gold Exchange Traded Funds (Gold BeES or SBI Gold Fund are examples of units that are listed on the National Stock Exchange and reflect the value of a gram of gold) enable you to buy gold in a demat form without the hassles of safety and storage.

Playing it safe

There are other safe options such as a Provident fund, bank deposits, government / corporate bonds, insurance schemes (those that factor in a return element) and mutual funds. Investing in instruments such as a Provident Fund Scheme, bank deposits and bonds give a fixed and pre-determined return. These are the safest since there are no surprises as to the amount of growth you can expect on your initial investment. In an order of priority, the above instruments are top of the list.

You could also choose to invest in equities, but, you must keep track of the performance of your shares to act accordingly. Speaking of equities, its close cousin, the mutual fund is an investment option that’s been making the headlines in recent times.

The right mix

There are two essentials to optimise the returns on your financial plan – an investment mix and fixing a time frame of investment. An investment mix is a combination of various instruments, with weightage to each based on certain parameters like age of the investor, his / her risk profile or the appetite for risks or lack thereof. Investment time frames can be classified into short, medium and long term.

Before we delve into these essentials, it may be worthwhile to check on what makes a financial plan work well for you, or conversely, to analyse why many people feel that their financial plan did not work for them.

The common mistake that most people make is to not draw up a Financial Plan that suits them. They end up allocating debt for long term and equity for short term, while getting carried away by incentives, special programs and “offers” on certain instruments. Even if experts advocate vociferously against it, there remains a tendency to follow the herd and be blind to the actual risk involved in supposedly “risk free” instruments.

There is a gross lack of understanding where most financial instruments are concerned and reliance on financial planners to choose what is best. You may certainly opt for advice, but, it is necessary to possess rudimentary knowledge of where your money is going, before you ink the cheque.

Age does matter

When financial planners set out to decide on an investment mix, they classify broadly into three stages of wealth, depending upon the age of the investor:

Wealth Creator – late 20s to early 40s

Wealth Manager – 40s through to 60

Wealth Preserver – 60s onwards

There are specific features of each instrument that we will go into in the next edition. Meanwhile, you can sharpen your pencils (not to mention your grey cells), find a sheet of paper and start to define your financial goals and the broad structure of your financial plan.