Investment ensures that the value of your money grows overtime which not only beats the menace of inflation but helps you reach life's various financial goals comfortably. Typically, children's education and their marriages, buying a car or owning a house and most importantly your self-retirement are among the common goals of an individual.
However, majority of investors tend to take quick investment decisions — often inappropriate and complicated at times, without much of a future planning. This leads to poor investment experience as neither are they disciplined nor are they future secure.
Investment is a simple but consistent process and not a complicated one as is generally perceived by many. It is equally true that wealth can't be created overnight. Rather, wealth is more often the result of a lifestyle of hard work, patience, planning and self-discipline. In fact, anybody can create wealth and attain financial goals, if he or she follows simple, small but consistent steps with discipline.
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Investment Thumb Rules
Rule 1: One should endeavor to invest a minimum 10% of the monthly income towards self-retirement. You may also consider is as planning for financial freedom for your second innings.
Rule 2: Set aside a minimum 15% of your income as part of your overall investment for your child's higher education and other responsibilities which are at least 10-18 years away.
Rule 3: Corner off 5% of your monthly income as investment for child's marriage. Since marriage is a high cost social affair, planning for it well in advance keeps you stress free when the time comes.
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Rule 4: Keep your monthly expenses and other costs for family maintenance at not more than 30% of your income.
Rule 5: The total Equated Monthly Instalments (EMIs) - be it home loan, car loan or personal loan - should not surpass a maximum 30% of your monthly income. Avoid any further loan if you already have reached this level. Disproportionate rise in liabilities do not go well with wealth creation.
Rule 6: Discretionary spending like vacation, entertainment should not be more than 5% of your income. This helps you save money which can further be diverted to investments.
Rule 7: Create an Emergency fund by saving 5% of your monthly income and keep it either in your bank account or invest in a liquid fund. Ideally you should have a minimum 12 months of your monthly income parked as an emergency fund. Such a backup does not let your investments go haywire during tough times.
Secure Your Family
Amid all this, the most important aspect is securing yourself and your family medically as well as financially. A health insurance does not let your pockets feel the sudden pinch of excessive expenses and a term insurance ensures your family remains financially stable even if you are no more.
Investing Approach
For goals such as retirement, child's education and marriage, you should consider diversified equity schemes which have the potential to yield 13-15% return in the long-term.
Individuals who are 25 year olds and is earning a steady income should not delay in applying these investment thumb rule. Since they have the longest working years and most of the major financial goals is a minimum 18 years away, following these simple rules of investment can create substantial wealth over the long term.
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For instance, let us consider a 25-year-old earning Rs. 15,000 per month. AS per the thumb rule allocation, if that person invests Rs 1,500 every month towards retirement for the next 35 years, assuming a return of 13%, the corpus generated would be Rs.1.25 crs. As per the thumb rule he further sets aside Rs.2250 for child’s education and Rs. 750 per month towards marriage expenses, post 18 years the education corpus will be Rs. 19 lakhs and the marriage expenses corpus will be Rs. 17 lakhs.
Taking a step further, if an individual of the same age has a monthly income of Rs 50,000, then basis the allocation the corpus created will be 4.25 crs for retirement, Rs 65 lakh for child’s education and Rs 55 lakh for child's marriage 25 years hence. The interesting aspect here is the amount considered here is static in nature. However, in real life as the income increases, so should the savings. As a result, the investment experience is only bound to be better if one stays disciplined.
