When Kedar Mujumdar took up his first job at the age of 25, he didn’t quite know how to plan his finances for the next few years, let alone setting long-term goals. But that didn’t stop him from investing right from the day he drew his first pay cheque. Most planners would advise you to follow in his footsteps and begin investing as early as possible.
Why start early
The main reason being the sooner you start saving for your retirement, the bigger will be your corpus. The later you begin, the more you will have to put in to reach the same amount or the more you will have to cut down on the size of your goal.
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For instance, if you need a retirement corpus of Rs1 crore at the age of 60, then assuming a 12% annual compounded return, you will have to put in around Rs1,554 per month if you begin at the age of 25 as against about Rs2,861 per month if you begin at the age of 30. A delay of just five years will mean that you will have to shell out almost double the amount for the same corpus.
“Besides, the ease with which you can set aside more money earlier in life may not be possible in later years as your responsibilities and liabilities increase with age,” says Ranjit Dani, partner, Think Consultants, a Nagpur-based financial planning firm. As you grow older, you are likely to get married and have a family and associated expenses and responsibilities.
As you begin creating assets for yourself and your family and take on various debts for the same, you may need a lot of discipline to continue saving and even enhancing it to ensure your future corpus is in sync with your changing lifestyle. Mujumdar explains how four years ago when he first started working, it was a lot easier to save. “I didn’t need all my income then, but today my expenses have gone up manifold due to increasing expenses and liabilities such as car maintenance and loan which is a big cost in itself.”
How much should you save
It’s important to begin saving early, even if it is with a small amount. Says B. Srinivasan, director, Shree Sidvin Financial Services Pvt. Ltd, a Bangalore-based financial planning firm, “Even if it isn’t a big amount, it’s all about the attitude and goes a long way in inculcating the habit of investing diligently.”
You can start with saving as little as Rs500 per month through mutual fund systematic investment plans if that is all you can afford.
Planners agree that anything between 30% and 40% is good to begin with. “In fact, if you are really conscious and savvy then depending on your financial situation, you could probably manage to save and invest even 50% of your income,” adds Dani.
However, as you grow older and your income grows, you must scale up your savings rate. One way to do it is to religiously put aside a part of your increased income into your savings. Mujumdar has been increasing his investments over the years and attributes it to his saving habit cultivated early in his life. “This is important because if your investments don’t increase with your income then the funds you set aside for the long term may not be able to beat inflation. Also, you will not be able to fuel the expenses your growing standard of living demands,” Srinivasan adds.
What to factor in?
It is best to invest with planned goals and targets as you can then choose avenues taking into consideration the time horizon and have a quantified target but not everyone may be able to chalk out their goals early in life.
Mujumdar is a case in point. “I knew I had to be investing, but my goals and priorities were not clearly marked out. But I knew one thing for sure: I would definitely not need the money I was investing then in the next few years,” he says.
Besides there are some milestones common to most people, such as marriage and buying a house, which require planning. “Apart from that, those in the 20s have a lot of aspiration—be it buying a car, camera, honeymoon abroad or taking a sabbatical. I tell the youngsters I work with to begin investing with these aspirational goals in mind,” says Dani.
If you are planning to take a sabbatical it is important to take into account that your earning may be zero during the period. Adds Srinivasan, “This means that apart from investing accordingly, make sure that you do not take on any investments or liabilities which require a long-term commitment. So avoid investments with a lock-in period, purchasing anything on instalments and insurance premiums if not required.”
Where to invest
It is advisable to put aside at least 10% of your income for long-terms goals and this is best stashed away in equities. Despite being volatile, markets have risen substantially over the years. For instance, if you had remained invested in the Nifty 50 from 2000 to 2010, your investment would have grown at a compounded annual growth rate of 15.27%.
However, it is important to take into account the risk factor and volatility associated with equity investing if you have a short-term goal. Says Srinivasan, “If you need the money anytime before three years then it is best to steer clear of these as your risk appetite would be low.” For instance, if you had invested Rs10 lakh in the equity market in 2008, you would have lost 52% in one year (based on Nifty returns from 1 January 2008 to 31 December 2008); markets crashed that year.
You could instead consider putting your money in debt or balanced mutual funds, liquid funds and sweep-in accounts.
Review your portfolio
It is always good to review your investments periodically. If you have money parked in equities for your long-term goals, then it is important to switch it to low-risk investment instruments when the goal comes close.
“If you have been investing without clear goals in mind, it is a good idea to take a look at your investment and tweak it when your goals begin to crystallize,” says Dani. For instance, your spending pattern may change once you get married or later when you start planning for kids.
Illustration By Shyamal Banerjee; Graphics by Yogesh Kumar/Mint
Lisa Pallavi Barbora contributed to the story