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By A.N. Shanbhag and Sandeep Shanbhag     
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All too often, it so happens that an individual has an investible surplus. However, on account of a lack of guidance – or worse – misguidance, the funds do not get invested wisely. Though each individual’s life situation is different, and a one-size fits all kind of approach isn’t the optimal solution, the following guidelines should be considered as a basic roadmap before undertaking any fine tuning to suit one’s personal situation.

To Begin

Every individual has assets, liabilities, income and expenses. The aim is that the assets should be more than the liabilities and the expenses lesser than income. If any one element is out of sync, it leads to financial distress and steps need to be taken to correct the same.

Retire All Debt Except Home Loan(s)

The only way in which your liabilities could be more than your assets is if you have taken loans or have credit card outstandings. A credit card is perhaps the most dangerous enemy of a good savings habit. The reason is to do with human psychology. Whenever you spend money, there is a trade off. Buying something gives you pleasure whereas putting up the cash for it is unpleasant. However, what if you could only retain the positive payoff without experiencing the negative emotion? Using a credit card allows you to do precisely this.

However, if you have to do something wrong, at least do it right. So use a credit card if you must but under no circumstances revolve the credit. Revolving the credit implies paying only the ‘minimum amount due’ and leaving the rest outstanding to be settled in the future. This outstanding amount becomes a loan given to you by the card issuing organization. And at 35% p.a. and above, India has perhaps the most expensive credit card interest rates in the world. A good habit is to pay off the amount spent on the card the very next day without waiting for the payment due date. Better still, use a debit card or cold cash.

Budget, Budget, Budget

After attending to the liabilities, it is time to turn to your day-to-day finances. The goal here is to put as much distance as is possible between income and expense. To do this, the answer is budgeting. And believe me, its much easier said than done. In the beginning the enthusiasm carries you through, but over time, one begins to lax ultimately leading to indiscriminate spending.

The trick is in not getting into the nitty-gritty and setting too precise a target. While it is important to plan, doing it to the second decimal point is unnecessary. Broad allocations to major expense heads like groceries, entertainment, fuel etc. would give you more than a good idea of where things are headed. And even for monthly budgets, weekly reviews are needed so as to have room for making adjustments in the coming week.

This way, there is no way that you can overspend and defer savings to the next month. Once again, we will come back to our earlier point of public enemy number one that works against good intentions. Someone we know set up a budget but then ended up overspending on her credit card. We actually advised her to take a pair of scissors and cut the card into two. It took six months to get her finances back into shape. But today, she is debt free and financially much better off than what she was a year ago.

Now, once the liabilities and expenses are taken care of, we can turn to investing the savings. As we have established earlier, it is not only important to save money but equally important is that you make the saved money work hard. In this regard, you should put it to work with the twin objectives of protection and growth.

The first priority should be the shelter and safeguard your family from the cost of any medical emergency. For which your first investment should be to buy medical insurance.

Medical Insurance

Medical insurance is a non-compromisable expense especially in a country like ours where the state does not cover medical costs. Everyone, young or old, male or female, salaried or a business person, without exception should get medical cover for themselves. Else, if and when the emergency strikes, apart from health consequences, the repercussions on your finances could be disastrous. Of course, if you are salaried, more often than not the employer arranges for medical insurance. Here too, most aren’t aware of the exact amount of coverage. Ideally, have a family floater policy for a minimum amount of Rs 5 lakh. The premium for a family of four comprising husband, wife and two kids would be in the region of Rs 8,000 - 8,500 per annum.

After providing for medical expenses, comes taking efforts to maintain and safeguard the standard of living and financial future of your loved ones.

Life Insurance

The basic financial tenet regarding insurance is that it’s a cost and not an investment. Combining insurance with investment almost always leads to sub-optimal returns. First, buy insurance only if your family needs it. Secondly, always, always, opt for a term insurance policy which is the cheapest and the purest form of insurance. A 30 year old can purchase a Rs 10 lakh cover for a premium in the region of Rs 3,500 to Rs 4,000 per annum. If you find you have bought expensive insurance, consider surrendering the policy. Sometimes you make the right decision and sometimes you have to make the decision right.

Public Provident Fund (PPF)

PPF is the best fixed income investment that you can make. Look at it as a fund for the education needs of your children. If you are married, get your spouse to invest too and you would have a retirement fund ready.

Equity

By now, all of us would know only too well that making money in the equity market is easy, losing it is easier. However, always know what you buy, buy what you know. If you invest on tips and recommendations, you are literally kissing your money good bye. If you buy a stock directly, it has to be something that you have done your homework on. A better overall policy would be to use mutual funds. The flavour of choice should be plain vanilla diversified equity funds with a minimum track record of over five years. Don’t time the market. It’s never worked, it never will. Invest for the long-term. Do not put a lump sum but instead start SIPs. Then continue the SIPs month in month out, year in year out. If you follow these simple steps, you can’t lose. Yes, there will be intermittent dips and falls, but over time, you will win.

Emergency Fund

Money lying idle in the bank is all too common. At the same time, investing the last penny that you have is also not desirable. Have no more than three month expense requirement available at any time. Out of this, cash equivalent to a month’s expense could be kept in the savings account and the rest invested in a money market scheme.

Last but not the least, be persistent. The secret of success is constancy of purpose. It’s really not that difficult to achieve financial freedom. The only tough part is to keep doing the right things day in day out, for the rest of your life. As Calvin Coolidge has put it so beautifully --- “Nothing in the world can take the place of persistence. Talent will not, nothing is more common that unsuccessful people with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and conviction alone is the key.”

So investing successfully is entirely up to you – the moot question is are you up to it?

The authors are leading financial advisors. Write to them at [email protected]

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