Grind now, Shine later

“Its easy to meet expenses – everywhere we go, there they are.” I came across this beautiful and meaningful quote the other day and felt duty bound to share a few thoughts with regards money and investing. Let’s assume you have just completed your academic degree and you have been placed in a corporate company through campus recruitment. You join your first job and have already made plans on how to spend your first salary or as a matter of fact, your first few salaries.

This tendency to spend continues, sans any focus on investment. However, you sooner than later realise that you are approaching thirties and you have not saved/invested any money (excluding your tax-saving investments done during December to March) in the past few years of your professional life. There are exceptions to the rule everywhere, we cannot deny any of a few being present in this category too.

To be precise, this time may not be too late to start your investment journey, it might in fact be the perfect time to start. Recall those times in school when you had this habit to study for your examinations and work for your projects at the last moment. In your professional career too, you would have the tendency to leave all your work pending until the day before submission.

During your mid twenties, your financial responsibilities/goals are small and short-term in nature, such as planning for that vacation, down payment for a vehicle, purchase of furniture etc in contrast to goals later in life such as down payment for house property, children’s education and marriage, etc. Short-term goals can be met easily by saving diligently for a couple of months and then spending again. However, when you start approaching your thirties, you realise that slipshod work shall not continue for long and wise spending is part of wise investing and it’s never too late to start.

Something that normally acts as an eye-opener for a large number of people is the fact that, one has to lose money in the equity market to understand the way it operates. In the same way a real life experience teaches you what no financial planner would have been successful at making you understand.

By this stage of your life, either you or anybody in your acquaintances would have been going through or would have gone through a financial predicament. This crisis would have been on account of job loss, unfortunate death, accident, disability, critical illness, hospitalisation expenses etc leading to a financial gloom. Imagine a time when a friend comes and asks for your financial help for overcoming such crisis or vice versa.

When you hear about or go through such experiences, you are forced to overhaul your money management techniques. You decide to keep aside money for exigencies and you start saving and investing systematically in recurring deposits (RD) or in Mutual Funds systematic investment plans or in the equity market.

At this stage of your life, you would have been working for at least over a three to four years, in which time, you would calculate how much have you saved and invested after putting more than 12 odd hours at work each day, you realise that it is near to NIL.

You do a quick back of the envelope calculation of how have you spent your hard earned salary, but in vain. You understand that the best utilisation of your salary was to pay back your education loan (if you had one) and the rest of the money has been spent on gadgets, travelling, partying or buying consumer durables etc. The only question that is ringing in your mind is – Where has all my money gone?, the answer to which you will never be able to get.

This is the time when you finally realise that it’s not only the quantity that you have saved but also the quality of investments that make a major difference. You might have saved for yourself to peddle through a crisis however your investments do not generate enough liquidity for exigencies. You understand that the money that you had saved for rainy days such as in an ULIP plan does not even return the capital employed, from a 3-5 years prospective. You acknowledge the fact that “0% interest on EMI through credit card” is a misnomer.

I am going to try and put in perspective a few basic financial objectives that would go a long way in addressing certain key concerns. First and the foremost, it’s advisable that you free yourself from all debt especially credit cards. Credit card bills accumulation is just like a parasite eating into your earnings.

If you have any education loan please note that it should be settled as soon as possible. The basic technique of building a debt-free portfolio is to spend less than you earn. Make sure that you pay off your EMI at the beginning of each month and manage the rest of the month’s expenditure with the remaining. While remaining debt-free is a great idea, you should also know how to make your money work harder.

Rupee cost averaging is the technique of making a particular investment through a fixed amount on a regular schedule, regardless of the price. A higher quantity is purchased when prices are low and fewer quantities are bought when prices are high.

Eventually the average cost of purchasing a unit steadily reduces. You should note that if you start early power of compounding can be magical. Systematic investment becomes important when an investor earns a regular income such as salary for meeting his day-to-day needs. Starting an equity MUTUAL FUND SIP early in your working career and staying invested with it is the best idea.

Believe that there is no elevator to success, you have to take the stairs. Another important aspect is having an emergency corpus that helps you to financially manage a job loss, illness and accidents etc. The corpus should help you survive through a storm of insurgencies. It is a common belief that three to six months’ salary should be kept aside for emergency.

At least once in a couple of months, you will have to spend on unbudgeted items such as a vehicle, consumer durables, repairs, etc. This expenditure, throws your monthly budget into total chaos. If you save at least 10% of your monthly income, then you’ll have enough money saved to meet these sudden spends without damaging your monthly bills.

If you feel that you cannot save 10% of your earnings, then you should cut down your expenditure accordingly to fit it in. You are as young as you feel and that might force you to think that mid-twenties is too early to start preparing for your retirement, however you should start taking baby steps to achieve the goal. For this, you could start investing in a Mutual Fund SIP with an amount as low as INR 1K per month. This will help you in planning your life goals with mutual funds and help you retire rich.

Make sure that you take the above mentioned basic steps at the appropriate time in your life and you would be better prepared for an enriched financial life tomorrow. With growing work pressure and stress levels, you can plan your retirement from your working life a lot earlier than what it used to be in your parents case. But surprisingly the average life expectancy has increased considerably.

This effectively means that you might have to retire early form your working career but you will have to live long post your retirement. Therefore, retirement planning should be the at the forefront when you start your career. Keep in mind, People lose their way when they lose their why and that should be the reason for you to build your own dreams else someone will hire you to build theirs!

(Ifthikar Bashir is a freelance Financial Advisor)