Yes, for all those who are well versed with Mutual Funds, the tagline for this post is derived from a product of Franklin Templeton Mutual Fund. Having said that, I do not wish to write about the fund for obvious reasons(you can just visit the link for that). The intention of using this tagline is to draw your attention to a bigger picture.
It may be because of my early entry into this financial advisory profession that I have built a healthy and well diversified portfolio aligned to my financial goals, but that was possible only because I took interest in different and new financial products. Yes, I agree that, being in the same profession your awareness is automatically higher, but that should not be a reason for all others who are into different professions to neglect their financial health and take no interest altogether. I have always felt that each individual especially those in their 30's should take some time out to update and take control of their financial health.
This post will help you build a basic perspective about your own life stage 30's plan
1. Take a term insurance policy: (I know I have said this before but its never enough)
Buying a term plan tops the list of smart money moves especially if you have dependents. The earlier you buy life insurance, the lower is the premium. It is best to lock in at a young age when you are hale and hearty. More importantly, a person who buys late is taking a big risk till he gets protection.
If you develop a medical condition later in life, you may have to shell out a significantly higher premium. If the problem is severe, you may be denied the cover altogether. Keep a few things in mind when you go shopping for a term plan. First, the insurance cover should be big enough to generate a monthly income for your family, cover major expenses, and settle outstanding loans. Second, the policy should cover you at least till the age of 60. Don't take a short-term cover of 10-15 years, which ends when you are in your 40s. You need insurance most at this stage of life and a fresh policy will cost you a bomb. Lastly, don't try to lower the premium by mis-stating facts in the form. If you smoke, drink or suffer from a medical condition , don't hide it. It may bump up the premium by a few hundred rupees, but your nominee's claim won't be rejected because of misstatement of facts.
2. Take adequate health insurance:
Health insurance is also cheap when you are young and costlier when you are old. More importantly, the rule about pre-existing diseases makes a compelling case for buying a cover early. When you are young and in healthy, the 3-4 year waiting period is a breeze. Delay buying the policy and you may be afflicted by medical conditions that usually crop up later in life. It's a misconception that the employer's group health plan is sufficient. While these are useful, they do not provide adequate coverage. Besides, if you lose or change your job, you may be rendered uninsured for a certain time.
4. Automate investments:
One of the most common excuses for not investing is, "I don't have the time." Days become weeks and weeks turn into months. Get past this stumbling block by automating your investments. For instance, you could start an SIP in a mutual fund and give an ECS mandate to your bank. On a designated day of the month, the money will be invested automatically. Saving time and effort is just one of the many benefits of automating your investments. It also takes emotions out of investing and enforces a discipline an investor may lack. If the money has been earmarked for investment and is debited from your account, you will not use it for any other purpose. I recommend that you opt for SIPs at the start of the month, this induces the much-needed financial discipline
5. Maintain an expense tracker
You have factored in the car EMI, the house rent and the grocery bill in your monthly budget, but have you kept tabs on the itsy-bitsy expenses, such as casual shopping for clothes, eating out, gifting, and entertainment? Most of the time, these smaller expenses go unnoticed even though they take up a large portion of the monthly budget. Studies reveal that discretionary spending can be as high as 18-20 % of young people's income. That's quite a large chunk and could impinge on other, more crucial, long-term goals. A 2011 study by Assocham revealed that almost 35% of the urban youth spend up to 5,000 a month on clothing alone. To plug the leaks I suggest you download this free app on your android smartphone.
6. Set up a contingency fund
It's always good to be prepared for an emergency. This is why I insist all of you to stash away some money that can be accessed at short notice. The contingency fund will come in handy if you are faced with unforeseen expenses, such as a medical emergency or losing your job. The size of this fund depends on your financial situation. Ordinarily you need to put away at least 3-6 months' living expenses for this purpose.
The money need not idle in a savings bank account, earning a measly 4%. Instead, you can put it in a liquid fund or a short-term debt fund. Check if the fund levies an exit load when the money is withdrawn within 6-12 months. There are also flexi deposit accounts in banks, where any sum above a specified limit flows into a fixed deposit to earn higher interest. Your money will earn the interest applicable to fixed deposits and at the same time will be available to you whenever you need it.
7. Start saving for major financial goals in advance
If the rise in prices of food items is bothering you, here's an even more disturbing statistic. Education costs tend to rise twice as fast as wholesale inflation. Assocham conducted a survey of 2,000 families across 15 cities in India and found that the annual school education cost had risen from 35,000 in 2006 to 94,000 in 2011. Higher education costs are increasing even faster. Five years from now, the tuition fee for an engineering course, currently pegged at roughly 7 lakh, would be close to 12 lakh. In 10 years' time, it's likely to cost around 22 lakh.
The only way to beat this jump is to start saving for your child's education early and a growing number of parents are already doing that. An ET Wealth survey in 2011 found that roughly 63% of parents started saving for their children's education before the child turned 3. Another 9% started even before the kid was born. That's good news, because the earlier you start, the more the time available for your investments to grow.
Conclusion:
There are obvious advantages of starting early. Most of us know that the longer we stay invested, the greater is the power of compounding. But not many investors realise this simple arithmetic, most of us have frittered away the early bird advantage. This post is intended as a wake-up call for Gen Y.
Wake Up!!
CERTIFIED FINANCIAL PLANNERCM
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