A paradigm shift on your personal finance
From the time we are born our parents have always instilled
three important aspects on us 1. Health 2. Morality and 3. Education. Later
parents, relatives, neighbors, teachers, and even society have always
emphasized the significance of our education. So, up until our school, college
days we have been guided in such a way that to be successful in life we need to
excel in our academics so that we land up in a good job. Most of us would have
slogged during our higher secondary days focusing on academics even at the
expense of sacrificing some of our special talents like sport, music, dance, or
relationship (skipping some key milestones of our relatives or friends) even
few vacations too. When we translate our hard work into to result we feel
ecstatic. I remember reading my first offer letter again and again even woke up
the next morning and read it again. Kind of a crazy feeling for a day or two. A
sense of pride and happiness as we are stepping into our first moment of
financial independence from our parents.
Once we start our professional life we are too focused again
on our job that we always think of progressing in our career. We upskill
ourselves and move towards climbing the executive ladder. Most of the
remuneration that we earn is spent without differentiating between the needs
and wants. Here is an illustration of the spending pattern of 80-85% of the
salaried employees.
|
Savings |
Expenses |
|
|
22-30 |
<=5-10% |
90-95% |
|
30-40 |
<=10-15% |
85-90% |
|
40-50 |
15-20% |
80-85% |
|
50-60 |
>20% |
<80% |
The current globalization era (Late 90’s to date) has moved
a lot of Indians from a conservative way of spending to western ways of
spending. “Need vs want” has a thin line, we need to apply our logical brain to
differentiate between them. Always try to find an answer to 3W1H (What? Why?
How? & When?) before buying a product. “Need” is something necessary to
survive whereas a “want” is something a person desire (more of futuristic). The
current ecosystem of marketing has ensured that “wants” are pushed as “needs”
to consumers. Social pressure also has ensured every aspiring middle-class
person to fall prey to these Maya.
80-85% of the working professional despite being in various
ages & stages of their life span has poor financial planning. Someone who
is a techie can crack an event like a hackathon also struggles in their
finance. The amount of energy they spend to upskill on their technical
abilities is astounding while at the same time they are not inclined towards
learning anything on personal finance. This has eventually led to improper
money management. They spent on the credit card, borrowing loans (personal,
credit card loans, 2wheeler, or car loan). The problem with most of them is
they do even know how much they pay on interest and how much on the principal.
How do we get rid of this fiasco? Let’s stick with a simple formula
Earnings –
expenditure = Savings
This is what we have learned and followed all these days.
Let’s make a small change in the formula without disturbing the equation.
Earnings – Savings =
Expenditure
Let’s abide by this principle and try to save the money
upfront once we earn, the rest of the money let us plan to spend. Now the next
question is how do we plan.? The guideline is 50/30/20 principle. 50% of the
earnings for the need like food and shelter, 30% for the vacation, hobbies,
lifestyle, etc. and 20% on the savings.
|
Age |
New Savings |
New Expenses |
Passive income |
|
22-30 |
20% |
80% |
0% |
|
30-40 |
20% |
80% |
<=5% |
|
40-50 |
25-30% |
70-75% |
<=15% |
|
50-60 |
>30% |
<80% |
>30% |
Till now I know the ways to earn and spend my expenditure.
The next big question is where to invest? and what are the financial
instruments available to invest? Most of you might have been aware of debt
instruments like Fixed/Recurring deposits, Gold. Or perhaps save money on a
private chit fund run by our relatives or friends. Few of them might have
invested in Mutual funds and few of them in equities - stocks. Also, real
estate has been a popular investment option in India considering the tax
benefits.
Mere knowing the financial terminologies of jargon doesn’t
help us too much. The next steps are to learn how to channelize the hard-earned
money into different financial instruments. Let me illustrate typically what
are the basic pre-requisites that a salaried person must do so that he can lead
a peaceful or stress-free life. Also, how his savings can help him during rainy
days (time of life where we have financial trouble or any unprecedented
situation like the pandemic we face).
|
Age |
Term Insurance self (1 crore minimum) |
Insurance family (Pension with term – 10 Lakh minimum) |
Mediclaim insurance – Outside employer benefit (2-5 lakhs) |
Bank
balance in a savings account (number of months of your salary) |
|
22-30 |
Yes |
NA |
Yes |
6 |
|
30-40 |
Yes |
Yes |
Yes |
12 |
|
40-50 |
Yes |
Yes |
Yes |
18 |
|
>50 |
Yes |
Yes |
Yes |
24 |
In today’s era life has become highly uncertain so having
insurance for self is mandatory, the earlier the better. The main motto of
insuring to ensure that the quality of life of our dependent family is taken
care of. Term insurance helps us with high coverage by shelling out a very low
premium. During the early ’20s, the insurance premium for a high coverage term
insurance is less than 10K rupees/annum. Also, as we grow a little old
especially after marriage we must add Mediclaim insurance for the family apart
from the benefits that we receive from our employer. The advantage of having
additional medical insurance is to cover up the medical expenses during a job
loss or if there is any gap between switching jobs or during a sabbatical from
work. Also running personal medical insurance in parallel tenure helps us in
covering some of the pre-existing diseases.
Family insurance helps us to plan for our kids’ educations. Nowadays
there are a lot of policies that act like term insurance cum pension schemes.
As per the age matrix in the illustration above we need to maintain that money
month of our monthly expenses. So this amount should be in our savings account
and it is helpful during the rainy days.
Now we have covered the foundation which is the Insurance
and Mediclaim policies. Let us now concentrate on other financial instruments
or asset categories. The thumb rule in investment is not to put all the money
in one basket. Also, the asset categories are cyclical in providing good returns
based on economic conditions. As a thumb rule try to segregate your savings
into these five-asset categories. Maybe roughly 20% on each of these
categories.
|
Asset
Category |
Sub
Category |
|
|
Equity |
Stocks |
|
|
|
Index ETF |
|
|
|
Mutual Funds Equity |
|
|
|
Company Stocks |
|
|
Debt |
NCD |
|
|
|
Bonds |
|
|
|
Corporate Deposits |
|
|
|
Debt Funds |
|
|
|
Bank Deposits |
|
|
|
EPF |
|
|
Cash and Liquid |
Savings Account |
|
|
|
Allocated Amount |
|
|
Gold |
Gold ETF and Bonds |
|
|
Real Estate |
House & Land |
What I have recommended in this article is mainly on ways to
invest money. But it is very important that you need to explore yourself on all
the above asset categories. Today we have a lot of learning aids available
online. All we need to do is invest time in understanding these concepts. We
can always curb our binge-watching habit on OTT platforms or get rid of
multiplayer games or fiddling on the social media platform, instead, we can
focus on these passive income generating topics.
I have realized this only in the early ’40s but I recommend
you all not to make the same blunder that I have made during my previous years.
I would like to finish by saying that our “Academic
education lands us in a 9-6 job whereas Financial education gets us out of it”
Happy learning guys...
With love
Keestu
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