HOW TO BECOME RICH

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How to be RICH in 6 easy steps!It is never too early or too late to start

financial planning and saving.

Financial planning assumes great importance in our lives as it helps in

accumulating greater wealth as well as helps in gaining financial security.

The key is to make a continuous effort to put away small amounts on a consistent

basis. No matter how little you make or how high your expenses may seem, it is

nearly always possible to put away at least some money for the future.

 

While most of us do randomly save and invest in an array of financial

instruments, it is always a good idea to do so in a planned and systematic way

for best results.

 

Here are six simple steps to help you plan better and help you towards building

a stronger financial future:

 

1. Define your goals

 

Goals differ from person to person. All personal wishes and dreams are a goal we

strive all our lives to achieve: buying a dream house, giving children a great

education, marriages in the family, yearning for an early retirement, long

deserved holidays in the Alps, the list goes on.

 

Each of these goals also has a cost to it; a financial implication and

commitment. It is important to define these goals and priortise them first. The

next step is to calculate how much money you would need to realise most of them.

 

Financial professionals often counsel investors to write down their goals. Their

intention is not to make you ponder over the meaning of life, but to help you

create the best plan to reach those goals along the way.

 

2. Estimate your present financial position

 

Having arrived at a ballpark kind of a figure of what is the likely requirement

and the time frame for each of the goals it is now important to take stock of

your present financial position.

 

You need to estimate, both, your net worth and your net income/expenses. Your

net worth, what accountants call a balance sheet, compares your assets (what

you own) with your liabilities (what you owe). It's a snapshot of your

financial condition at a specific time.

 

Your net income/expenses helps you see your monthly disposable income -- i.e.,

the income you have left over after paying all necessary expenses. And that

tells you how much you can afford to contribute to your financial goals each

month.

 

3. Choose your investments according to your life stage

 

Ability and capacity to take risks varies and the horizon for investments

changes depending on the life stage one is in. The type of instrument best

suited for an individual depends upon the life stage he or she is in.

 

If you are between 20 and 40 years of age

 

People in their twenties and early thirties are in the beginning of their

careers. The type of financial planning they do is often influenced by the work

sector of their employment.

 

Many are married and either thinking about having children or already have young

ones around the home.

 

People in their thirties and forties are established in their jobs and in the

midst of raising a family. They are concerned about their children's future

and, perhaps, equally concerned about elderly parents.

 

The 20-to-40-year stage is one where responsibilities are relatively less and

hence risk-taking capacity is at its highest. Apart from investing in

tax-saving instruments, investing a sizeable portion of your invest-able

surplus in stocks-either directly or through a mutual fund makes imminent

sense.

 

This is the time to maximise the growth of your investments. You can consider

70-80 per cent exposure in equity and the rest in debt instruments

 

If you are between 40 and 50 years of age

 

This is the age when one has to plan for expenses like kids' higher education,

their marriage, etc. In this stage, capacity to take risks is lower than in the

earlier stage.

 

Aggressive investing in stocks is not the done thing. In order to balance out

the portfolio one should look at some conservative instruments like income

funds, bonds and other fixed income instruments.

One may consider reduction in exposure to equities to 40-60 per cent.

 

If you are between 50 and 60 years of age

 

Retirement thoughts have now started and the larger expenditures such as child's

marriage are lined up. At this stage, preservation of accumulated wealth should

be your prime concern; hence growth takes a back seat.

 

The portfolio requires churning to reallocate risks and a considerable portion

of your wealth will need to be parked in lower-risk, fixed income instruments.

Liquidity is also a priority at this stage.

 

A portion of your financial assets should be kept liquid and readily accessible

for day-to-day needs and any kind of emergency. A mix of 30-40 per cent in

equity and balance in debt and other instruments is recommended.

 

Retirement

 

Planning and accumulation for retirement is generally the most important

accumulation goal which one addresses in his or her personal financial

planning.

 

Risk management planning and asset allocation into different baskets help in

addressing many of the possible risks one encounters on the way to achieving

financial goals. However the risk of living too long or outliving your income

is the biggest risk during this period.

 

One has to ensure that all the planning and investing pays-off now and the

dividends and/or interest earned on lifelong investments form a steady stream

of income sufficient for a decent living.

 

4. Invest across asset classes to diversify risk

 

Risk management is the cornerstone of any financial planning effort. One of the

basic principles of portfolio building is diversification. As the old saying

goes, 'Don't put all your eggs in one basket.'

 

One can reduce the risk of investing over the long term by spreading out the

investments and diversifying into different classes of assets like equities or

stocks, bonds and fixed deposits, mutual funds and real estate. Within each

category further diversification is also possible. For example, . buying

equities or stocks of companies that are involved in different businesses.

 

5. Decide how active you want to be and implement your plan

 

Managing one's savings or investments, whether they are in stocks, bonds, mutual

funds or real estate requires a good understanding of the markets.

It may be worthwhile to invest some time in learning about these markets and

investment options. In the absence of this, one could probably start out by

investing in a Systematic Investment Plan of any good mutual fund.

 

6. Budget for your investments

 

Once all the planning is done, start investing. The best way is to keep aside a

fixed sum of money every month for your investment budget.

 

This way the expenses remain in control and you will be ensuring that you are

moving towards your target. Ideally the amount should reflect your goals and

your planning.

 

It doesn't matter even if it's as small an amount as Rs 1,000 per month. Just start now.

 

Happy Saving!

 

The author is Managing Director and CEO, IDBI Capital Market Services Ltd.

 

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