A Decade or two ago, life was comparatively much simpler financially. One would go to school, maybe to college, married in your 20s, have children by your 30s, work in one company for almost one’s entire working life, buy a home on retirement, and retire peacefully by 60. Things are different now.
For starters, life is much more expensive. We are much more impatient. We job hop so often that even getting gratuity is not a given as it requires staying in the same job for at least 5 years. Timelines for getting married and having children are delayed or extended, education is much more expensive, buying a home comes much earlier, and if we don’t plan carefully, retirement can come much later. Healthcare is much better so life expectancy is longer. These factors are a few of many that contribute to the increasing need to plan the client’s financial life.
So, creating a successful and powerful plan for your financial life in today’s times has very little to do with your age and a lot to do with major life stages/events when you make the plan.
Stage 1: First Real Job
*Low opening bank balance
*No financial dependents
*Low tax incidence
*Unmarried, no children, so financial goals are limited to himself and his parents
An Individual has graduated and just got his first real job. He is most probably living a frugal life. A critical concern at this is managing his cash flow.
Although he might feel like he doesn’t have the money, even saving 10% of his income per month is enough to start planning for his retirement. If he is 23 years old and in his first year of working he manages to save and invest Rs. 24,000 (Rs. 2000 a month for 12 months), then at a growth rate of 15% per annum this Rs. 24000 will grow to Apprx. Rs. 40 lakhs by his age of 60 and if he increases this 2000 per month by 10% every year, he can accumulate a corpus of Apprx 1 crore 80 Lakhs.
Most likely he has no financial dependents at this time so he might not need life insurance, but he should definitely opt for health insurance. This has dual benefits- firstly, his health is insured and this is most important. Secondly, he can claim a tax deduction of the premium paid, under section 80D.
Tax Efficient Investment
If his salary brings him into the 10% or 20% tax bracket, the first thing he should do is avail of section 80C deduction- invest into an ELSS fund (equity exposure) and into his PPF account (debt exposure ). Check how much he is contributing to his EPF (debt exposure again) and invest accordingly. His limit is Rs.1.5 lakhs under section 80C.
Start building up a contingency fund for use only in case of emergencies. Typically this should be the equivalent of 6 to 24 months of client’s monthly expenses depending on his personal risk appetite. Set this aside into a liquid or liquid plus mutual fund to earn a better rate of return than his bank account.
Note: Any equity investments done at this time and held for a period of 5 years plus will most likely yield a high rate of return and therefore beat inflation. At this stage of life, equity can be taken for the long haul.