Financial literacy is an absolute essential and should be a continuous learning right from your school days. Unfortunately, that is not the case. We are woefully unaware of basic financial concepts and this ignorance can be really harmful - both mentally and physically. Here are 5 important things that one should know about personal finance.
Savings & Investments – The very first thing to know is that savings and investment are two totally different things. Saving is the money kept aside from your income for short term needs and can be easily accessed whenever required. Investment on the other hand, is the part of the saving that is employed for the purpose of growing its value to meet long term financial goals. Investment needs a good bit of financial knowledge – taxation, pros and cons of the multitude of investment options, cognizance of one’s risk appetite, well defined financial goals. It also requires consistency and discipline and of course the motto is “START EARLY”. To know more, read my other blog - Are Savings and Investments the same?
Financial Goals – Imagine you start your first job. It’s just the start of your career so you want to enjoy a bit and not worry of responsibilities. Fast forward 10 years later you’re married, and the responsibilities start knocking at your door. Now you wonder why you didn’t start investing for the future which you see for yourself – a cozy house, a complete family with kids, their education, etc. This is a common scenario when one does not have well-defined financial goals. The goal must be – like any other goal in life – SMART (Specific, Measurable, Achievable, Rational Time bound). In the above example, if you had goals while starting your job like “an emergency corpus of Rs. 1 Lac in a saving account by 12 months after starting my job”, “buying a small car within a budget of Rs. 8L in the next 3 years”, “a corpus for a flat with a budget of Rs. 1Cr. in the next 10 years”, you would have specific financial targets in mind and would adjust your expenses, lifestyle, and investment portfolio accordingly
Compounding
The most potent weapon in your investment arsenal is the magic wand of compounding. Compounding simply is the accumulation of compound interest on your investment & returns over a period. The longer the duration, more will the compounding effect be – hence you will often hear “not get out of the market” – whether it is your Mutual fund portfolio or stock portfolio or any other asset class. Staying invested is the credo many live by. The “rule of 72” which you must have seen floating on your Whatsapp groups is all about compounding. Generally, long term investments give higher returns. We often are told to always transfer and not recover the PF amount after shifting jobs or to always invest in PPF immediately after the beginning of the new financial year in April instead of the last-minute rush to complete 80C provision in March – all these strategies are doing is extracting the maximum possible interest returns from the investment. Many people always do PPF investments in the first week of April, always transfer and never withdraw provident fund after changing jobs, stay invested in your SIP/MFs. Consistency and disciple go a long way in your financial goals.
Inflation
We all hear the word inflation from time to time and relegate it to some economic or financial jargon that “does not affect me”. Ignorance is certainly not bliss here; it in fact could be a killer. Inflation has a huge impact on all our lives, whether we like it or not, right from the value of the money in our banks, to the return on our investments, to the interest on our loans, even the vegetables we buy in the market
If you keep your savings under a carpet or in a safe in your housing, hoping that they’ll come handy in the future, you’re in for a rude shock.
Portfolio distribution
It is simply the distribution of your wealth in different asset classes - equity, real estate, debt, gold/silver. An ideal investment portfolio should include a healthy mix of equity (40-45%), bullion (10-15%), debt (15-20%) and rest of the allocation to real-estate.
However, the investment portfolio of most Indians is heavily skewed towards real-estate with upwards of 80% allocation in property, equity contribution overall is between 5-10% and the balance goes to bullion, debt instruments. Real-estate and debt instruments used to be a preferred investment modes in earlier generations who associated prestige in owning a house and viewed equity as too risky. The average residential rental yield is 2% or less. Which means it will take at least 50 years to recover the purchase amount of the house/ flat / land (this does not include the interest paid in case of a home loan!). Property cannot be sold easy (not liquid) and the capital appreciation of a property is generally less than the CAGR returns of investments in equity instruments like stocks or mutual funds. However, one should aim for a healthier distribution to achieve financial goals.
Comments
Post a Comment