Planning is a simple yet crucial step towards building a secure financial future. Several aspects of our life depend on how we plan our savings and manage our money. While savings are often thought about as a means of wealth creation, planning for life’s uncertainties is often ignored.
Below are what I consider essential financial planning rules, to ensure that you are financially secure at all times.
1. Start investing early
Many of us tend to delay the process of managing our finances, but this pushes the benefits of compound interest away from us. You may have heard the famous saying “Time is money”. Let me suggest a new one “Time grows money”.
As a rule of thumb, you should look to save 20 per cent to 30 per cent of your monthly income. Plan the savings first and then the expenses.
2. Avail Section 80C benefits
Most of us struggle to save taxes. A simple tax saving option like 80C can actually save us from paying hefty tax amounts. While this is one of the most basic methods of tax saving, I find that a lot a people miss out on this out of nothing but sheer laziness.
Within the 80C scheme, I prefer ELSS Funds over the traditional PPF scheme. Equity Linked Saving Schemes (ELSS) have historically outperformed the PPF option and allow you to invest up to Rs 1.5 lakh in a financial year. For instance, your total yearly earnings are Rs 7.5 lakh and you invest Rs 1.5 lakh in the ELSS, your taxable income will reduce to Rs 6 lakh.
3. SIPs and Debt Funds
Once we have set aside our savings, where do we invest this? For young professionals, where risk appetite is usually higher, I would recommend a 70 / 30 split between equities and debt. If your risk appetite is lower, then increase your debt component.
When investing in equities, opting for an SIP would be my recommendation. This strategy allows you to average out your entry points and hence automatically insulate for short term market volatility. You can choose from the many mutual funds that are run by experienced teams and have returned over 20 per cent CAGR over the last 10 years. That said, please ensure that you come with a long-term view when investing in equities.
If you invest Rs 100 each month for 10 years and assume 15 per cent CAGR, you have Rs 28,300 in 10 years!
Traditional bank FDs have been popular as a means of saving. But government bonds, debt funds or even blue-chip corporate debt can increase your yields by 2-5 per cent annually. Moreover, you can even get tax advantages if you invest in debt for a minimum period of 3 years.
4. Get insurance cover
Life is unpredictable, so yes, insurance is critical. My recommendation is to buy a life insurance policy with 10x of your annual income as the coverage amount. The coverage amount should meet all liabilities like your home loans, car loans and also the amounts needed for future expenses like education of your children. Along with a life insurance, it is also important to have medical coverage to fight the ever-rising healthcare expenses — you’ll be surprised at how much a single medical treatment can cost these days.
There are numerous options available for you to choose from based on your budget and requirements. There is a whole host of brands out there vying for your attention right from Max Life to Tata AIG, LIC & Edelweiss. Ensure that you go through the offer document of multiple brands. A seemingly similar scheme can have small differences that will matter to you, so take your time before zeroing in on one.
5. Leverage the platforms that cater to easy savings
We now have many sites and apps to help us save money while shopping, making travel bookings, and even shave a little off the day-to-day purchases we make. Saving on recurring expenses is one sure-shot way to reach a big pot of savings over a period of time.
Using services like Dineout, CashKaro and Zomato Gold can help us cut down regular expenses substantially. For example, if you eat out a lot, Zomato Gold can help you save anywhere between Rs 500-Rs 1000 per meal. Similarly, if you shop online a lot, CashKaro can help you save Rs 5000-Rs 10000 per month. A combination of these methods will give you anywhere between Rs 5,000 – Rs 30,000 of additional savings every month, depending on your current expenses.
This brings me to the final tip – Invest in yourself! Simple things like going to the gym, meditating and eating well can save you a lot on lifestyle-based expenses and doctor consultations.
Money saved is money earned. So, make sure your hard-earned money is well managed.