By Sanjiv Bajaj
Let’s face it: as a young worker, you may be torn between the consumerism around you and the idea of saving for the future. While there’s nothing wrong with spending some of what you earn, you also need to take care of your financial future.
Let’s look at some key steps in designing a financial plan that can give you the best of both worlds: saving for the future without compromising spending today.
Don’t shy away from creating a family budget. Start with a simple format and over time fill it in more to accommodate even minor income or expenses. This will help you control your finances and determine the surplus to invest.
Before you even think about investing, build an emergency fund. Whether it’s a temporary job loss or a medical emergency, you should keep at least six months of expenses in an emergency fund. Use short-term debt funds or cash funds to park cash for emergencies while getting a higher tax return than a bank savings account.
Take out adequate health insurance for yourself and your family in addition to the group insurance provided by your employer. Likewise, maintain life insurance of at least 15 times your annual net income. Once the risks are covered, you can start thinking about saving for the future.
Now is the time to plan your future. It starts with identifying your goals such as buying a home, raising children, getting married and your own retirement. Based on the number of years to achieve them, find the inflated cost and amount you need to accomplish them. You can then start saving a fixed amount for each goal, simplifying the investment journey.
Even when you start investing, have an asset allocation plan ready. Dependent on one asset class can ruin your long-term financial plan. Depending on the duration of your objectives, your risk profile, etc., keep your funds diversified between various assets such as equities, debt, gold or real estate.
Now the building of your investment portfolio begins. From equity mutual funds, debt funds, gold funds, sovereign bonds, debentures to PPFs and several other investment options, you’ll soon find plenty in your portfolio. Keep your investments diversified across assets, but don’t diversify much within a category. For market-linked investments such as mutual funds, continue to evaluate their performance against their benchmark at regular intervals.
The author is Co-Chairman and Managing Director of Bajaj Capital