Financial Independence – Transforming struggle in the past to a promising future
Having being employed in the Information Technology sector for more than a decade now, the time has flown at an unprecedented pace. For most of us in the sector who joined at that time as an entry-level trainee or related designations, to now mid-level positions (wherein now scrambling hard to learn new skills with changing dynamics of the industry to stay afloat), things have undergone a sea change. It is true with the majority of other industries (not just IT) wherein automation, cost efficiencies have made sure you as an individual come out of your comfort zone (from what you have been doing repeatedly for years together), learn new skills (and that too quickly) or else your job is always hanging by the sword.
With all these uncertainties, as a typical middle-class family, we have at minimum one of two loans at our avail starting from a big-ticket home loan, a car loan or another loan type. Every month, at the back of the mind, the stress is that how all the monthly EMI payments along with other ever increasing mandatory expenses will be taken care of. In a case in any of the month, there’s a big outflow due to any reason, stress is at an unprecedented level. We all experience it but as an individual, we seldom show it. We at times desperately think of getting out this mess but are always wary of anyone providing advice on our finances. It’s not there in our DNA to talk openly about our financial health and how to make it better.
Past is done away with but we can definitely transform our future. We need to make sure we get straight to the goal of attaining financial independence and don’t procrastinate. Promise yourself that you need to be financially independent, provide best of living standards to your family and hence you will invest diligently and regularly as per your goals.
Start your SIP’s if you haven’t till now
Looking at past figures is of less use now but its always good to learn from the past so that we don’t make the same mistake in the future. Even 2000/- SIP started 10 years back would have yielded close to 5.2 lakhs as annual CAGR of 14% and if you plan to continue this investment for the next 20 years too – over a total 30 year period, your investment of 2000 monthly SIP will yield close to 1.1 Crore at CAGR of 14% (against total investment of 7.2 lakhs for a 30 year period). Isn’t it staggering?
Now if for the first 10 years you missed the bus and haven’t invested, 2000/- SIP over the next 20 years will yield only 26.3 lakhs at 14% CAGR. Isn’t the difference between end corpus – 1.1 crore and 26.3 lakhs too huge?
What’s the learning – ‘Start early. Power of compounding is too huge to be ignored’.
There’s no substitute to start investing early for your goals. There’s no shame is investing for your retirement right from our first pay cheque and initiate investments for child education and marriage – the day child is born. Investments also can be started from as low as 500/- rupee Sip per month – so any excuse that I don’t have enough investible surplus doesn’t suffice. To any readers, reading this article and want to take learning – start investing now if you haven’t done till now. There’s absolutely no substitute to start early. You will end with a relatively bigger corpus in the future. Don’t procrastinate investments or else you will repent it a few years down the line.
Goal-Based investing is a must
As it happens in our personal or professional lives, we need to make sure there’s a goal behind anything we do. So for financial freedom also, we make financial goals, so that focus is spot on the goal and no deviations. Spend some time with your family to pan out financial goals, prioritize them and map each of your investments to goals. There should not be any investments without any goals attached to it. We tend to invest randomly in stocks, mutual funds without any goal or thought process, adequate research and end up making big losses. Working out your goals and expected corpus required will also be an eye-opener as to how much you need to invest going forward to achieve your specific goal. Goal-based investing is a must for each and every household.
A large bulk of investors tend to discontinue and redeem their SIP’s after a year as they feel market fluctuations too uncomfortable to handle. A goal-based investing will make sure you will be aware how far your goal is and will calm your nerves down if the goal is for the long term. In that case, more the fluctuations in the market, greater benefits you will reap in the long term.
No casual, irresponsible investing please, buying policies because your good friend is selling it and its just a few thousand rupees only will reduce your investible surplus with that much amount. Money at your disposal is only limited and you must act responsibly. No ULIPs, insurance-sum-investment products, etc.
‘Tax Saving’ is not just to save tax
This is the domain wherein maximum miss selling happens. There is a large chunk of retail investors who by January, February and March end of the year, don’t plan their tax saving investments and face a dilemma at that moment. At these times, such policy sellers are at their aggressive best – you are in a need to immediately buy something to ‘save tax’ and as a result fall prey to such disastrous investments. Make sure you plan your tax saving investments upfront at the start of the financial year and don’t leave it to the fag end of the financial year. The most significant thing is tax saving investments should serve the dual purpose of creating wealth and not just save tax. So choose your options diligently and don’t randomly put money in random financial instruments. Equity Linked Savings Scheme (ELSS) is one of the best equity-linked tax saving investments while Sukanya Sammridhi Yojana, PPF, VPF scores on the debt side. Consider National Pension Scheme (NPS) also as additional tax saving investment over and above 80c investments.
Create adequate emergency fund but don’t overdo it
Creating an adequate emergency fund is very significant before you start investing for your long term goals. You need to make sure that you have adequate liquidity at your avail before you start to commit savings for long term investments. How much an emergency fund should be left to the fellow investor to decide depending on kind of job, his personal comfort levels to name a few. However, anything over and above that figure should be diverted towards your financial goals. Creating an adequate emergency fund is significant to create a strong financial future. Don’t have large amount stacked up in your savings account just that it looks good to log in to net banking and see it. Keep money in your bank account which is meant for investments will never make you rich. Do it definitely but don’t overdo it.
Don’t directly venture into equity investments to being with
Though this point is debatable, for an average retail investor, it will always be beneficial to not venture into direct equity investment if an investor is a first-time investor and don’t have required expertise. Mutual Fund investments via SIP mode is the best place to begin and get a hang of volatility associated with investing in equities. Once an investor is comfortable with the associated market volatility, observe one’s portfolio go up and down due to series of local or international factors – only then the investor should take a call if one prefers to also venture into direct equity. Direct equity needs a different level of time, temperament, constant tracking of stock and business fundamentals than what is required in a mutual fund.
Buy adequate term and medical insurance cover –
After creating an emergency fund corpus, having an adequate term and medical cover is paramount to your financial future. In today’s uncertain times, make sure you buy adequate term insurance and also medical insurance with a top-up for critical illness. You will never want your family to struggle financially if you are not around, nor would you like to see your investments drain down paying hefty medical bills. It will be advisable to cover under India’s top 2-3 insurers and not venture in lower ones with a bait of relatively lower premium. Don’t procrastinate buying it for any reason.
Be aggressive in your investments upfront
No one will come to tell you this. Be an aggressive saver and equally aggressive investor right from the early years. For the majority of retail investors, I have met, time from 25-35 is a ‘lost decade’ for them wherein there were clueless as to what investing is all about. Make sure you will not be one of them if you still are in your early or mid 20’s. By an aggressive saver and investor, it doesn’t mean investing in a big amount in mid and small cap stocks, it just means be aggressive in starting saving a month on month and investing them in wealth generating assets such as ELSS or open-ended mutual funds, etc. A simple example can be opting for a top up SIP rather than a normal SIP – ‘top up’ will enquire you SIP amount increases every year by a certain percentage. End corpus will be much much huge than created by plain vanilla SIP. Push yourself beyond your limits.
Maintain impeccable discipline towards your investments
Creating long term wealth is more about your approach towards money and investing rather than kind of funds you have chosen over the long term. So make sure, irrespective of what people are saying around you-you are clear in your mind as to how to keep investing irrespective of big market fluctuations to create long term wealth. Ignore the noise is also equally important. For instance, if investments for PPF has to be initiated between April 1-5 of every year, then you have to make your contribution is invested during this time and not later. Maintain exemplary discipline.
Getting rich is more of discipline you showcase towards investing regularly without fail over a long term than some specific funds you invest in. Make sure you keep your investing simple and increase your investments as salary increases. A huge corpus made over a long term will be very beneficial to achieve financial goals such as retirement, education, marriage to name a few.