Focusing on growth-oriented investing only is not the right approach. Capping expenses and building assets are just as important
FOR most people, providing for the future is achieved simply by putting their savings into certain investments so that the money grows. Yet, focusing only on investing is a narrow minded approach. There are other equally important elements associated with this process.
MEDICAL INSURANCE
One cannot compromise on this expense especially in our country where the state does not cover medical costs. Without medical insurance, 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 `.5 lakh. The premium for a family of four comprising husband, wife and two kids would be in the region of `.8,000 - 8,500 per annum.
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 `.10 lakh cover for a premium in the region of .3,500 to 4,000 per annum. If you have already 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. An annual contribution of `.70,000 will get you around `.32 lakh in 20 years. 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.
BUY A HOUSE
There is never a good time to buy a house. The sooner you do it, the better it will be. Opt for housing finance, even if you have your own funds. Home loans are the cheapest loans that are on offer. The opportunity cost of the funds if wisely invested will almost always be higher than the interest rate on the home loan.
AVOID CREDIT CARDS
So use a credit card if you must but under no circumstances revolve the credit. 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.
EQUITY
If you buy a stock directly, it has to be something that you have done your homework on. Use mutual funds instead. The flavour of choice should be plain vanilla with a minimum track record of over three years. Invest for the long-term.
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 liquid fund.
Last but not the least, be persistent. Doing the right things day in day out, month in month out, year in year out is tough. But, doing it, you cannot lose. It's really that simple.
