Everybody needs and should have an investment plan. Whether you are saving for goals such as for a child’s education or home or you are saving for retirement – you need an investment plan. And don’t worry – it really is simple.
But, there are so many financial products in the market today and so many options. Not all of them are right for you. So how do you decide which products you should invest in and how much? Here are the actionable steps for building a financial or an investment plan.
Let’s first look at goals and retirement. According to me, saving for a child’s education or for buying a home is not a goal. It is in fact a big expense. The goal is to invest and earn enough to meet these big expenses. There’s no reason why investing for a house should earn a different return from investing for a child’s education. Similarly, I think retirement should not be a goal. The goal in fact should be financial freedom – the freedom to do what you want with your time and when you want to do it without worrying about money. This may not necessarily be only after the age of 60, but could be earlier.
So how do you save up for big expenses and financial freedom? Here are the four fundamentals of investing, followed by 10 essential steps to an investment plan.
Fundamentals of Investing
- Your investments should be built on a strong foundation so that they get a chance to grow in the long term with the power of compounding. You must therefore protect against anything that will eat into your savings and investment.
- All investments are a play between Returns, Safety and Liquidity (ability to quickly convert to cash). If something is high, then something else is low. Therefore have some investments that are safe but may have low returns or liquidity. Have some investments that are risky but give a high return and some that are liquid for that crazy emergency.
- Your return doesn’t have to beat that of your friend’s or neighbour’s. It has to beat inflation.
- Have good investment habits – the best time to start investing is “now” (even if you start small), be regular and be patient.
10 Steps to an Investment Plan
Step 1
Charles Jaffe, a financial author said “it’s not your salary that makes you rich, it’s your spending habits.” Save at least 20% of your net of tax income. Here’s how to save more.
Step 2
Nothing burns through your investments like a medical emergency. So the first step is to get Health Insurance. Get your own health insurance even if your employer has provided one (here’s why).
Step 3
In order to protect your family, get Life Insurance. Everyone will try to sell you Endowment or money back policies and give many reasons. But the biggest is that they get more commissions from you. Just forget about these and simply get a plain vanilla Term Insurance plan (here’s why). If you have taken loans to buy important things, such as a home, then have a separate term policy for that as well.
Step 4
Health and life risks can be insured. Create an Emergency Fund to protect against risks that are beyond these. It’s like your piggy bank – break in case of emergency. For example, loss of a job. Will you take the first thing that comes along or have the finance to hold for what you like. The Emergency Fund can be invested in low returns but liquid investments. Remember, the purpose of the emergency fund is to provide cash quickly should the need arise. As long as it earns more than a piggy bank, you should be happy.
Step 5
Safety First. Start with, or if you’ve already started, then invest some money in safe investments. Most people will not guide you to do this as the commissions on safe investments are quite low. If you are employed and are contributing to an employer’s provident fund, then invest a bit more through VPF (Voluntary Provident Fund). Alternatively invest in PPF (Public Provident Fund). Both provide good returns with safety. They have low liquidity, but that is the reason to start early, because they become more liquid as time goes by.
Step 6
Invest in Gold. Even though it is an unproductive asset, it has over time, given good returns and is the one that people turn to during a downturn. It also helps diversify your investments and may be up when that stock market is down. It’s also possible to save tax on gold. Gold is now available in many different forms – see here to know which form of gold is best for you.
Step 7
Avoid Fixed Deposits – invest in Debt Mutual Funds instead (here’s why). Over time, debt mutual funds give better returns due to tax benefits that help the power of compounding, are more flexible and not unsafe. Always select the “growth” option.
Also avoid Pension Plans (here’s why). Don’t get taken in by all the marketing noise. It’s possible to retire and get enough money without pension plans, through regular investments in mutual funds that are more flexible and in certain cases more tax efficient. You can do an SWP – Systematic Withdrawal Plan, to get regular monthly income (remember, we said always go for the growth option and not the dividend distribution – now called the IDCW – Income Distribution cum Capital Withdrawal option).
Step 8
Invest in equity shares, preferably through equity mutual funds – let professionals manage your money. Equities are the best way to beat inflation. Always select the “growth” option. Remember that investing is not the same as trading.
Step 9
Although we don’t suggest you do it, you may leave some part of your savings (10% of your savings, eg 2% of net of tax income, if your savings are 20% of net of tax income) for extremely high risk investments – such as for trading or high return bonds. Trading can be thrilling, as any gambling is, and takes up a lot of mind space. If you want the high returns without the continuous mind space, then you may invest in high return bonds.
Step 10
Control your loans. Only take that EMI (equal monthly instalment) which you can afford. You must continue to save along with paying EMIs. Settle your credit card bills regularly – don’t roll them over. Credit card debt is very expensive.
Finally
In order to know how much of each investment suits you, you can build your personalised investment plan with Propel Money here.
From the book – Big Panda & Tiny Dragon by James Norbury:
‘Which is more important’, asked Big Panda, ‘the journey or the destination?’
‘The company’ said Tiny Dragon.
We’re happy to accompany you on your investment journey!
