The rule of thumb in financial planning is simple: Whether you are considering lump-sum investments, long-term planning or reviewing your holistic financial status, it is important to set your goals and then steer your finances in the right direction. The sooner you start, the better the chances of achieving your financial goals. Here is a general list of suggestions.
Between 20 and 30 years
Budget: You are starting with life’s rigours and this is the time to start keeping a monthly budget to help you understand how your money is being spent. If you continue with this, it will stand you in good stead through life. Get into the habit of saving a part of your monthly income.
Building blocks: Start early to meet your financial goals.
Tax: Get to know personal taxation issues and how they affect your salary. Figure out the efficient investments you can make annually to save on your taxes. For instance, check out equity-linked savings schemes (ELSS).
Investments: Start investing in mutual funds through a systematic investment plan (SIP). You can start with a very small amount. Take advantage of compounding of capital, and the ability to take financial risk.
Personal accident and disability insurance: While you are still single, you may not need life insurance, but it is worth getting protection through a personal accident policy.
Health insurance: Make sure you have a health policy. Buy something in addition to your company’s healthcare plan.
Auto loans: If you are taking a loan for a car or a two-wheeler, keep in mind that you are creating a liability to buy an asset that is losing its value daily.
Other debt: Avoid personal loans and credit card debt.
Between 30 and 40 years
Real estate and financing: If you aren’t already living in a house of your own, plan and buy one, and build an asset. Get household insurance as well. If you already own a home, consider a real estate investment to generate rental income to fund your retirement.
Long-term investments: Understand that you need long-term investments in place to fund your goals, such as your child’s education and marriage, upgrading your car, buying a bigger house. Consider stable and diversified large-cap mutual funds as the core of your investment portfolio.
Life insurance: It is likely that you have a family and dependents by now, so you need to ensure their financial security by having adequate life insurance. Continue your personal accident protection either as a rider on your life policy or as a separate policy.
Health insurance: Get a family floater plan. If your parents are below 65 years of age, get health coverage for them as well.
Retirement planning: Invest in a pension plan. Start thinking about your will and how you want your assets to be transferred.
Between 40 and 50 years
Liquidity: Understand when you will need capital to fund large expenses, such as the education and marriage of your children. It can take you a few years to exit your investments to meet these funding goals. Don’t lock your money into investments you cannot get out of.
Debt: If you have any outstanding liabilities, start thinking about reducing your debt burden as you start preparing for retirement. Use your peak earning years to start reducing your financial obligations so that you have no financial liabilities pending at retirement.
Life insurance: The number of financial dependents may have changed if your children have started working. Update your insurance coverage accordingly. If certain policies are about to mature, figure out what you will do with the proceeds. Renew your health insurance.
Retirement planning: Keep your retirement-related investments in secure instruments according to your risk profile. Update the analysis of your expenses during retirement, your retiral accounts such as PPF, PF, etc.
Investments: Harvest investment income from previous investments, such as MFs or rental income, and divert these proceeds towards secure long-term investments that will protect you against the rising cost of living. Adjust your portfolio allocation away from high-risk funds to more diversified, balanced equity funds and relevant fixed income instruments.
Will: Prepare a will and get it registered.
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