Your Money: Six steps to designing a financial plan
By Sanjiv Bajaj
Let us accept the reality— as a young salaried individual, you could be torn between the consumerism all around you and thoughts about saving for the future. While there’s nothing wrong in spending a portion of what you earn, you also need to take care of your financial future.
Let us look at a few key steps in designing a financial plan that can give you the best of both worlds—saving for the future with no compromise on today’s spending.
Budgeting
Do not run away from creating a household budget. Start with a simple format and over time populate it further to take care of even minor incomes or expenses. Doing this will help you have control over your finances and also in determining investible surplus.
Emergency cash
Even before you think of investing, build an emergency fund. Whether its a temporary job loss or a medical emergency, you need to keep at least six months expenses in an emergency fund. Use short term debt funds or liquid funds to park money for emergency use and yet earn a higher tax efficient return than a bank savings account.
Risk management
Take adequate health insurance coverage for self and family in addition to your employer provided group insurance. Similarly, keep life insurance of at least 15 times of your annual take-home income. Once the risks are taken care of, you can start thinking of saving for the future.
Goal setting
Now comes the time to plan for your future. It starts with identifying your goals such as home buying, children’s education, marriage and your own retirement. Based on the number of years to meet them, find the inflated cost and the amount you need to accomplish them. You can then start saving a fixed amount towards each goal thus making the investing journey simple.
Asset allocation mix
Even while you start investing, keep an asset allocation plan ready. Depending on any one asset class may ruin your financial plan in the long run. Based on your goals duration, risk profile, etc., keep your funds diversified across various assets such as equities, debt, gold or real estate.
Investment portfolio
Now, building up of your investment portfolio begins. From equity mutual funds, debt funds, gold funds, sovereign bonds, debentures to PPF and several other investment options, you will soon find many of these in your portfolio. Keep your investments diversified across assets but do not diversify a lot within a category. For market-linked investments such as mutual funds, keep reviewing their performance against their benchmark on regular intervals.
The writer is joint chairman & MD, Bajaj Capital