It’s never too early to start planning your finances, but it can get too late. So if you are turning 30 and haven’t taken the investment path yet, get going now. As you grow older, certain financial products become more expensive or even inaccessible. Starting early would also ensure you have more “investing” years. Here are four things you must look at.
Rationalise your debt
Credit cards: If you are a single working professional in a city, it’s more than likely that among clothes, movies, night-outs and lavish dinners, your credit card bill has got inflated. That in itself isn’t an issue, but over-extending your credit period on a credit card is. In some cases this can translate into taking a loan at interest rates near 39% per annum."A number of people who come to us are highly debt-ridden," said Rajiv Bajaj, MD, Bajaj Capital. "As part of our process, we do a scenario analysis to see what future finances would look like before and after financial planning."
Get rid of carrying forward your credit card dues beyond the 50-day credit cycle. You have to pay late charges, and also finance charges or interest on the outstanding. It’s not even okay to pay the minimum charges and carry forward the balance; you pay interest on the remaining amount at a monthly rate of 3-3.25%. (See Graphic)
Personal loans: Many take personal loans early in life for immediate expenses. Pay back all those loans and stop taking any more. Here too you are paying an interest rate as high as 18-20% per annum (or more), which can substantially eat into your monthly surplus.
Home loans: Housing loans are of less concern as it is an asset that appreciates in value. But remember, don’t stretch your finances too tight on that loan, too. Real estate is a relatively illiquid asset and can’t generate cash immediately.
Life insurance: Whether you are single or married, life insurance is a smart thing to do to take care of your dependents and loved ones. Pure term insurance plans that come with a sum assured, which gets paid to the nominee in case the insured dies (but otherwise generate no returns) are the cheapest and simplest form of life cover.
“Life insurance is about sharing risks, so younger people benefit as the mortality charges are lower,” said Pranav Misra, executive vice-president, ICICI Prudential Life Insurance. “Therefore, protection can be procured at lower prices. This stands true across all life insurance products.”
Health insurance: This is one policy that every individual must have, especially given the soaring cost of medical bills.
If you are a professional, there is a good chance that your employer provides a health insurance policy. Usually, group insurance policies are relatively more flexible. For instance, most group insurance policies cover pre-existing diseases.
But depending solely on that is not advisable. “There can be concern if you are in between jobs or the new company doesn’t provide the same plan or doesn’t cover a pre-existing illness,” said Sushil Jain, certified financial planner and head (financial planning process), Bajaj Capital.
The insurance regulator has now allowed you to port your group health insurance policy to individual health insurance plans of the same insurer. After a year, you can change the insurer but be cautious: when moving from group health insurance to individual health insurance, it is the number of years of continuous coverage from your group insurance that is portable.
Mint Money recommends a basic health insurance policy that pays your hospital bills and reimburses expenses incurred before and after hospitalisation. A family can also consider buying floater policies, which treats the entire family as one unit.
Diversify your portfolio
Once you have cleared unnecessary debt and taken adequate insurance, it’s time to consider an investment portfolio.
When you are young, you have fewer financial responsibilities and it is possible to save a larger percentage of your income. “Typically, people start with tax saving-linked investments,” said Kartik Jhaveri, founder and director, Transcend Consulting (India), a private wealth management company. “Start simple instead. Go to a bank, understand interest payments and then move on to products such as recurring deposits. Do that for some time and then increase your risk quotient and graduate to systematic investment plans (SIPs) in equity.”
At 30, if you invest R2,000 per month, assuming your portfolio (mix of debt and equity) earns 10% per annum, you will have a corpus of R1.55 lakh at 35 years and R5.18 lakh at 50 years of age. (See graphic). Also, remember to invest across asset classes.
Plan your retirement
If you are in your 20s or in early 30s, saving for the sunset years may seem premature. You may argue there is ample time to plan retirement, but the sooner you start the less taxing it will get later.
Firstly, have a target corpus in mind. Complement it with cash flow discipline. Your retirement corpus depends on retirement age, desired standard of living, inflation, taxation and your current investments. Keep these in mind to arrive at a potential future cash balance; take the help of a financial planner to do the calculations.
“You can inflate on present cost of living to the age you want to retire and arrive at a corpus to cater for the years after retirement,” said Jain. “Keep this corpus separate from other goals such as children’s education and marriage.”
The next step is to choose the assets and products that will help you reach the target you have set. Thumb rule: the younger you are, the more exposure to equities you can take. But in addition to equity investment, you must also consider debt products.
If you are a working professional, maximise your Employee’s Provident Fund (EPF) contribution. It has been giving tax-free returns of 8.5% for some time now; in FY11 it declared a rate of 9.5%. The next in line is Public Provident Fund (PPF). For quite some time, PPF has been giving 8%; from this year, the rate will be pegged to the yields of government securities. Other than these, you could also consider National Pension System (NPS). At a fund management charge of 0.0009% per annum, it is the cheapest managed fund in the industry.
So go ahead and build a strong financial foundation.