The road to financial fitness

Got a question about your money? What you should or should not do with it?

Our expert Devang Shah has the answers.

Monthly take-home salary: Rs 26,000

Monthly payment towards car loan: Rs 6,792 (five year loan, 14 EMIs paid)

Personal monthly expenses: Rs 5,000

Contribution to home: Rs 5,000

I want to save Rs 5,000 every month. Where and how must I begin?

- Ravindra Aggarwal

Dear Ravindra,

The key question is where do you want to end? That's not a joke.

When Alice (in wonderland) was lost in a tunnel, she met a cat whom she asked: "Which road do I take? The cat said the answer depended on where she wanted to go. To which Alice responded: "Anywhere. It does not matter." The cat promptly told her she could then take any road as it did not matter.

You want to save. That's great. But to what end?

If you are saving up for a downpayment for your home, you need to put this saving in a bank fixed deposit or a Floating Rate Fund such as Templeton Floating Rate Income Fund. This is a mutual fund that invests in floating interest rate instruments as against fixed interest rate instruments.

If you don't need this money in the next six years, a Post Office Recurring deposit which gives 8% per annum might be a good bet, if your tax bracket is nominal. This will entail you putting in a fixed amount every month.

The stock market looks very hot right now, but long term money (money that you don't need for 7-10 years) should be channelised into equity investments over time. You could consider taking steps in that direction after the first 6-12 months of a successful savings programme.

• How to decide your home loan tenure

I am 24 with a monthly take home salary of Rs 23,000.

I have no investments nor insurance. Where must I begin?

- Baddula Ramakrishna

Hi Baddula,

You have already begun. You want to begin and that's very important. A lot of people don't even want to begin until they get to their mid 50s!

As I mentioned in the answer above, your next step should be visualise the purpose for which you want to save/ insure. This is a very interesting exercise for most of us, because for once we get the freedom to take our minds away from the daily firefighting we do; it allows us to put our thoughts to where we want to be.

It is very important to do this for a number of reasons. 

What you want to achieve should be the topmost factor in taking financial decisions. This exercise helps you put that parameter in place.

If you are clear in your mind about your life goals and are able to articulate them in terms of time and money, the investment process flows through well.

Your goals would look like marriage, retirement, home purchase and higher education.

Now you need to put a time frame and amount to these. A good fee-only financial advisor could be of tremendous help here. However, if you prefer to do it by yourself, you must remember to factor in inflation for the figures.

So, for example, if you need Rs 20 lakh (Rs 2 million) for a home purchase, 10 years later, at 5% inflation, you will need about Rs 32.5 lakh (Rs 3.2 million). 

Financial goals, with the amount required and the time frame in which they are to be achieved, are financial objectives. Let these be your beacons. Prioritise these.

Now, for this year, get a hang of how much you can really save. One painful way is to set a budget after going through your bank statements, cheque and deposit counterfoils for the last three years.

Another way is to start a Systematic Investment Plan with a good mutual fund, for an amount that you believe as a reasonable saving figure. This will entail a fixed amount being invested every month in a mutual fund. At the end of one year, you will know if you could save more or the amount that you decided to save was too optimistic.

With this much under your belt, you would be ready to make an investment and insurance plan for yourself. At that point, you will have to educate yourself to do it or go to a good financial advisor.

Illustration: Dominic Xavier

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