- Save or InvestBefore we embark on a journey towards financial independence, let us first understand the basics of savings and investments. A disciplined investor creates a balance between the two.Saving is the process of parking hard cash in extremely safe and liquid securities. The primary aim should be capital preservation and the secondary goal getting some returns, if possible. This can include savings accounts and certificate of deposits among others.
Investing is the process of using money/capital to generate a safe and acceptable return over a time-period. An investment can include real estate, gold coins, stocks, mutual funds and small business to name a few.
Differentiate between saving and investment
- Savings are ideally smaller, for short-term goals in the near future like a vacation, emergency etc.
- Liquidity is high, giving ready access to cash when needed.
- There is typically no risk involved.
- You can earn interest on your savings.
- Investments involve putting money to work to create wealth for achieving long-term goals like child’s education, house etc..
- Liquidity is usually not easy when you invest money.
- Risk involved is usually high.
- Investments have a potential to yield higher returns, where investments appreciate over time.
How much should one save and invest?
Savings is the foundation to build your financial goals. Savings will provide you the capital to design your investments. The two basics that ideally need to be followed are:
- As a thumb rule, your savings should be enough to cover personal expenses like loan payments, insurance, utility bills etc. and any unforeseen expenses.
- Any specific purpose that will require a large corpus of fund in five – ten years should be investment driven. For eg. purchasing a home after say five years will require a steady investment objective today.
Define your goals
- While saving, your primary goal is to secure your money without losing any of its value. Though saving money preserves its nominal value, it’s opportunities to grow are limited.
- While investing, you give your assets the potential to grow over a time-period. Typically, you re-invest your interest, dividends and other capital gains. More often than not you are willing to take risks while investing your money. But with the appreciation in money, also comes the risk of losing money. Hence, keeping a long timeframe is usually recommended to recover from any decrease in value.
Here are the potential choices to be considered for savings:
- Savings accounts
- Money market accounts
- Certificate of deposits (CDs)
- There are a host of investment options as well:
- Individual Securities such as stocks and bonds
- Pooled investments such as mutual funds
- Real Estate
How to make financial planning work for you
Goal Situation Save(Or)Invest Buy a car You intend to buy a new car within a year. Save Down payment for a house You would like to move into your new home in another 3-5 years Save Child’s higher education Your toddler just started pre-school. Probably at least 15 years later you will need a lump sum amount Invest Have a comfortable retirement You have just turned 30, you plan to retire at 60. 30 years of prudent saving will take you through Invest
Whether you’re building your own business, or just trying to take charge of your finances, several financial experts offer targeted advice for women. No matter which stage of life you’re in, or if you’re a novice at finances, there is a lot you can do to achieve financial security. Let’s see how:
Usually, early adulthood refers to the ages of 18 through to your mid-twenties. For many, early adulthood means either tertiary education, part-time or full-time employment. Financial experts say this is the ideal period to begin your financial journey. It is the right time to start simple saving plans – it could be for your college tuition, a vacation, or even if you’re planning to move out of your parents’ home.
The easiest way to kick-start your financial planning at that age is to set aside a small amount of money every week, which will make a massive difference to your savings in the long run. Starting a fixed or recurring deposit makes this task easier for you. You could also set up a fund for your future goals, say – an extensive travel plan to check things off your bucket list.
If you have a 3-5-year investment horizon, consider investing in a balanced fund or a large-cap fund. You can also save on income tax by investing in Equity Linked Savings Scheme (ELSS or tax-saving mutual funds).
Tying the Knot
Marriage is a significant milestone in every one’s life and not to mention, one of the most important transition periods too. With marriage, many other milestones follow like buying your first home and preparing to be a parent. When you marry, it’s not just your financial security that you have to take care of, but that of your partner and your family too. Discuss your savings, expenses, debts and investments with your partner, so you can together build a comprehensive investment plan secure your collective financial future.
Things you could do include starting a joint savings account. You could also invest in liquid funds for near-term goals or for day-to-day or monthly expenses. For longer term goals (5+ year horizon), you could invest in mid or small capequity mutual funds.
As a parent, you’ll have new expenses to take care of – childcare, schooling, higher education and maybe even your child’s marriage. With several financial goals to achieve during this stage of life, the best way forward is to start a SIP for each goal. Also remember that as your income increases, keep increasing your SIP amount as well. By planning early for your child’s goals, you not only invest comfortably over a long-term but also avoid getting into huge debts. This will benefit you in the long run.
To say that retirement planning is essential is an understatement. A safe and financially secure retirement is the dream, which can be a reality for many women. Retirement though several years away is the goal you need to start investing for very early on in life. This is because you need to build a corpus that will allow you to lead the life you want for 20+ years once you retire. Start a long-term SIP in an equity mutual fund, and as you get closer to retirement shift your investments towards assets with lower risk (debt funds). Your investments can continue to grow, and with Systematic Transfer Plans (transfer from equity to debt for stability) and Systematic Withdrawal Plans (transfer from debt funds to bank for monthly income) you can make your retirement a happy one. Read our golden rules for retirement here.
When weighing your options, be sure to contact your financial advisor so you can successfully navigate your finances at every stage of your life. It is never too early to get proactive about your finances.
Health is wealth. Good health is not just the absence of any illness, but complete physical and mental wellness of an individual.
In today’s world, stress affects both physical and mental health – and one contributor to stress is the state an individual’s finances.
We all have financial goals we want to reach, and savings just don’t cut it. It’s important to invest. While we invest, how do we know we’re doing the right thing for our goals?
Here’s where your financial doctor, or advisor, comes into the picture. Just like you need a doctor for your physical or mental health, you need one for your finances too.
So, how can your financial doctor help you?
- Understand your financial health –Your financial advisor will work with you to assess your current financial health – your assets, liabilities, income and expenses. He/she will also consider any expected future obligations (insurance, taxes, other long-term expenses) and sources of income (pension, gifts, etc.) to get a complete picture of where you stand.
- Assess your goals –Once your advisor maps out where you stand, he/she will understand your investment goals, time frame and risk appetite. An understanding of risk appetite will allow your advisor to determine your asset allocation. He/she will also assess your retirement needs at this stage.Invest now
- Build the financial plan –The next stage is where your advisor charts out a comprehensive financial plan for your goals. This plan will include details such as where to invest, how much to invest, for how long to invest. He/she has the expertise to understand how all these products will work in tandem for you to achieve your goals. The plan will also look at your retirement plan, your projected withdrawal rates during retirement and have the best- and worst-case scenarios for your expected life span. If you’re already investing for your goals, your advisor will review your current habits and suggest a course of action. If you’re investing without goals in mind, your advisor will help you allocate your existing investments for your goals. Read why goal-based investing is important here. Once your plan is ready, it’s on you to implement it.
- Help you understand where you’re investing –When building your financial plan, it is important to understand the products you’re investing in. The pros and cons, how it fits in your portfolio, what it can do for you – your advisor will help you with this.
- Regular reviews and adjustments –It’s a good idea to revisit your investments regularly to check if you’re on track, review what you’re doing and see if you need to adjust your plan to incorporate new goals or modify/remove existing ones. Depending on your needs, your advisor will suggest changes to take you closer to your goals.
Financial advisors are the doctors you need for your financial health. With their expertise, you can get the best out of your investments.