Want to spend more than you earn? Take risks

Everything is possible; this is truer today than it was ever before.

Today, we live in a time where we can desire to have more, can afford more and there is maximum likelihood of achieving all that we expect out of life. Following are two questions to which you must answer in the positive, not only to proceed further but also to ensure that you are able to achieve your financial aspirations whatever they may be:

1. Am I totally committed to achieve what I really want?
2. Am I prepared to do all that it takes?Let’s understand where we come from and where we are today…

Say 20 years back, it was a challenge to be in an employment that would pay well & provide consistent opportunities to grow both financially and professionally. On the other hand, investment strategies those days were rather straightforward. Most people would stay with fixed interest instruments. The returns were pretty good; be it the NSC/PPF/Bonds/Insurance policies or even bank deposits. PPF & pension policies would comfortably fund retirement years. Most other requirements would be fulfilled via fixed deposits, insurance policies and bonds. Further, there were defined benefits for retirement, job loyalty & security was the norm, expectations were mediocre and our family values took care of most issues and difficulties. It was a different world then.

Today it is not such a challenge to be able to earn reasonably well with double income households, economy on a growth trajectory and opportunities abound in practically every field. In fact we are generating far more investment surplus than our previous generations ever did!

Alongside with increasing income and surplus, our needs have expanded even more; and why not?

Getting more…
The mantra to get more out of life at every stage of life, whether it is to provide the best future for children or a very comfortable retirement, or the ability to spend and buy what we desire, or simply living and enjoying life. For e.g. A holiday abroad was a lifetime dream for most Indians and today we think in terms of a long weekend in Venice or an evening in Paris literally. The cost is perhaps 2-3 months salary and installments tend to make life easier. In short, things are far more achievable today than before and we want even more. There is but one flip side to all this… that the traditional investment returns have shrunk and the old investment strategies will just not work going forward. The obvious thing to do then is to look at alternate investment strategies for wealth creation and those are quite complex today and will get even more complex tomorrow.

The impending challenge is then how to best channel the surplus; given that most fixed interest instruments today do not even beat inflation and that the impact of tax reforms (current and the proposed EET tax regime) will make the situation even worse.

How to manage financial aspirations?Consider this:
If the incremental cost of living (say inflation) is at 7% and that we are paying 30% income tax, we will need to generate 10% just to break-even i.e. to simply maintain the standard of living. Now think … which known financial product provides a 10% investment return?

Here is a simple thumb rule:
If we are invested in any product providing investment return equal or near the prevailing rate of inflation, we are most definitely eroding our wealth. The impact will only be seen much later and which is why most of us wanting to invest into so called “SAFE” products such as bank deposits, traditional insurance policies, bonds etc. do not realise that these “SAFE” products in reality might be wealth destroyers. From this perspective, “Are these “SAFE” products really SAFE and in our best interest?”

However if we still decide to play it safe in life, we\''\''ve pretty much decided that we don\''\''t want to grow anymore and financial aspirations either have to be compromised or may have no scope in our life.

But… if we feel the strong zeal to fulfil our aspirations, then at this stage we must allow for a bit of financial risk to come into our lives. The new words we must understand are Risk & Risk Management. These would be the most important words going forward. Given that we understand these words very well in the context of our own work and profession, we now need to only apply them to our money & financial affairs.

In order to fulfil financial aspirations one also needs to give due consideration to many other aspects of the overall investment strategy such as cashflow & budget management, hedging, asset allocation, use of equity, mutual funds, commodities to name a few.

Consider this:
Say an investment Rs. 1 lac was done about 8 years ago in a diversified equity fund, the value of the Rs. 1 lac would be approximately;

1. Rs. 3 lacs if the fund delivered a 15% compounded return
2. Rs. 4.3 lacs if the fund delivered a compounded return of 20%


This is not fiction. There are many mutual fund schemes that have delivered such returns. As the time frame of the investment becomes longer the perceived “RISK” reduces significantly. Such strategies have the potential to enable us to fulfil our financial aspirations.

Having said this it does not necessarily mean that one should not invest in bonds nor does it mean that one should put all the money into equity investments. A good financial plan must analyse merits of investment products in light of the aspiration to be achieved. Thereafter a sound portfolio gets created which delivers returns as desired.

We live in a time that is highly rewarding, where changes are constant and transformation rapid. Opportunities are being generated and will keep re-generating over time letting our aspirations touch the skies and even higher.
It is possible to achieve most financial aspirations over a period of time, so don’t let them remain like mere dreams that most cherish… and that only a few conquer!

Quick Tips-

• Do not make rash decisions based on “hot tips” or “popular fads” or “momentum”
• Do not blindly invest through agent’s or broker’s recommendations – Please ask for their professional qualifications.
• Do not overbuy Insurance or fixed deposits etc.
• Consult experts and professionals like Chartered Accountant, Certified Financial Planner, Chartered Financial Analyst etc.
• Articles, publications, newsletters can also help you make decisions.

5 must haves in your financial first aid kit

When it comes to our medical health, we leave no stone unturned. The first-aid kit is usually armed with all the necessary medicines. But talk about financial health and guilt creeps in. More often than not, the financial first-aid kit is not sufficiently equipped.

Emergency cash -

Emergencies could be anything - from serious medical conditions to a sudden setback on the job front. Emergency cash is a must-have in your portfolio. How much one should set aside for this really depends on each one’s income and lifestyle. But investment advisor Ajay Bagga suggests a broad thumb rule. He says, “Around six times the monthly expenditure can be kept in a liquid asset like a bank deposit, as an emergency pool.”

Medical insurance and life insurance -

The former for your life and the latter for your dependents. You need to have a medical insurance policy in place, not just because it gives you a tax break, but because it is the best way to fund your medical expenses. Taking medical insurance early on in life is an advantage because you have the benefit of good health on your side. Most insurance companies cover pre-existing illnesses only if you’ve had a policy with them, for more than five years. Also make sure you renew your policy on time.

Branch manager of National Insurance, Hema Shetty told Moneycontrol, “In case a policy is not renewed in time or if there is any gap while renewing it, the policy will be considered as a fresh policy and whatever exclusions apply in the first year of the policy will be applicable.”
You also need enough life insurance so that your financial dependents could invest the money and live modestly on the proceeds. So go ahead and find out how much insurance cover you need!

Child’s education fund -

Start planning early for your child’s future. While you may not know exactly how much you ought to save, you could look at setting aside small amounts every year. Here you need to ensure a good asset spread, which provides adequate safety and growth. Certified Financial Planner, B, Srinivasan advices, “For a medium risk person, a spread of 40:60 or 60:40 in debt to equity is acceptable. At the same time, one must maintain a good mix of liquidity and flexibility. It is important to keep away from instruments whose returns will be subject to tax incidence, on an accrual basis.”

Retirement Fund -

This is the most ignored in all financial plans. Nuclear families are in and so are longer lifespans. Inflation and escalating medical costs will also be always around. Therefore, you need to build up a corpus that will not only take care of routine expenses but also provide for extra healthcare costs that you may incur. You need to have a corpus of funds, which will give you close to 100% of the salary you enjoyed while working, to preserve the lifestyle you are used to.
The trick according to Certified Financial Planner Kartik Jhaveri, is to devise a professionally counselled and well-managed asset allocation portfolio. Typically, for a 25 to 45-year age band, the accent should be on equity investment. The amount to be invested in equity should necessarily be determined by the risk appetite of the individual.

Make a Will

If you die without making a Will, your family will have to follow certain ‘laws of succession’ in deciding how to split your assets. It is a misconception to believe that all the estate is automatically passed on to the spouse. Children and relatives can also stake claim to the properties. Laws of inheritance and succession are diverse and complicated. Making a Will is sensible because it leaves you to decide how your wealth is used. But unfortunately, most Indians simply forget to make a Will.

Have you made a Will yet? Do it now!