Personal Finance – A way to comfortable living!

“Don’t work for the money, let the money work for you…”

Elders of the family are in the habit of gifting their nieces, nephews and grandchildren with money. This money is then usually used to buy gifts and toys for the kids and the rest is spent by the parents. This cycle has been going on for generations and will continue in the future.
Now instead of spending the entire amount, say the expend is marginalized and the remaining amount is invested in desirable securities. Let’s suppose the investment is of ₹ 1000 per year for 15 years i.e. total of ₹ 15000. On a conservative note, with 8% average annual return, the accumulated corpus at the end of 15 years will be about ₹ 29,320. With 12% annual return it will be ₹ 41,753. And with 15% it will go up to ₹ 54,717.
The advantage of undertaking such a project is three-fold:

i. The kid inculcates the habit of saving and investing early on in his/her life. One less thing to worry for the parents assuming they are already aware of the benefits of investing.
ii. The kid learns a thing or two about personal finance and investment which unfortunately is still not taught in schools.
iii. In a more realistic scenario, the individual starts accumulating corpus at a very young age. The power of compounding ensures that the individual has a reserve fund for future needs.

This is just one tiny example of what a regular and timely investment can do. The same can be followed by people of all ages and strata throughout their lifetime. Of course, with the passage of time the needs and wants of the individual change. Various factors get involved such as required savings, expenditure, financial security, goals in life, risk appetite, advancement of age, etc.

Some common questions which need to be addressed.

I. How much to invest?
II. When is the right time to invest?
III. For what duration?
IV. What are the investment options?
V. What are the risks involved?
VI. How much money would I make?

To answer all these questions a financial plan has to be made.

  1. To start with you consider the current financial situation taking into account your current income, monthly living expense, savings and loans if any.
  2. Once you are aware of your financial position you decide your financial goals. This includes both long-term goals like child’s education, child’s marriage, securing future for your dependents, retirement planning, estate planning, charities and short-term goals such as vacations, buying a car, home furniture, etc. These goals should be realistic.
  3. Now that the financial goals have been decided, the next step is to identify the means to achieve these goals. Here you need to consider different alternatives of investment in various securities, asset allocation, insurances, etc.
  4. While finalizing on one alternative you need to evaluate every option by taking into account your risk appetite. Every security has some risks involved. Also, every security is expected to give certain returns. There are various financial ratios such as Sharpe ratio, Treynor ratio, Jensen measure which will help you compare the different portfolio alternatives and come to a decision.
  5. Next you implement the chosen plan.
  6. Once the plan is implemented it needs to be reviewed and revised on regular basis. This review will keep in check your asset allocation in various securities, the accepted risk-return trade off, etc.

Every individual has different financial requirements based on their own situation, wants and needs. Putting your money in some security solely based on hearsay is not a good financial practice. A good investment for one person can be a bad investment for the other.
To make this decision you need a sound knowledge of financial markets or a good financial advisor.

“Know what you own, and know why you own it!”