I have no clue what to do with my savings!

Divya, a disciplined saver, never takes a risk with her money. But strangely, once the moolah accumulates, she has no clue what to do with it!

Well, according to our experts, saving without a purpose is not, necessarily, a good thing. They have some smart advice to offer this working professional:

Vital statistics

Name: Divya Mehta
Age: 30
Profession: Banker
Location: Mumbai


Saving strategy :

Divya has been working for the past nine years. A self-confessed, disciplined saver, she says, "I set aside a percentage of my income to invest in fixed deposit (FD) and provident fund (PF) every month."

That's indeed a great start to wealth creation. But probe a little further and one finds gaps in Divya's savings plan. In a freewheeling chat, Divya tells us how she goes about managing her money and we, in turn, tell her the bad money habits she should bury before the new year sets in.

Divya has no financial goals!
"I don't know what I want to do with my money. I don't even know my net worth is!" she says.

Divya saves 85% of her net income and spends the remaining 15% on routine and miscellaneous expenses. She stays in her own house and has no other major expense. If she earns Rs 40,000 a month, she saves Rs 34,000 and spends the remaining Rs 6,000.

According to financial advisor, Kartik Jhaveri, goal planning is very critical, when you are investing on your own, there are a couple of questions you need to answer:

a. How much to invest?
b. What do you need to buy?

"Having a tangible target gives you direction and it also pushes the probability of owning what you want higher. A goal helps you decide how much to compromise on what you want, " he adds.

So, first things first. Divya must draw up her financial plan and decide on the purpose of her saving. This will give her an estimate of how much time and money she would need to make sure her desires come true.

'I don't like to take risks'
Divya has been investing diligently in FDs and PF for over eight years, now. She says, "My money is not growing as much as I would like it to grow."

She invests less than 5% of her entire investment in stocks and mutual funds. And believe it or not, she makes no withdrawals.

What she does not realise is that she is stunting the growth of her money tree. Inflation is the worst enemy for debt products. If her FD or PF is giving her 8% returns, inflation has been 5% over the last 10 years on an average. Her effective returns: only 3%.

So, while she proudly says that her investments have grown 40 times over the last eight years, her expenses too would have grown thanks to inflation.Investment advisor Sanjay Matai says, "The focus, now, should shift towards newer products such as equity mutual funds." Since Divya is a long-term investor (remember: she doesn't make withdrawals), equity is the best vehicle for her. Equity will give her returns of 15% over a long period of over 10 years. Equities are also more tax-friendly than debt products like FDs.

Budgets are so boring
Divya confesses, "I am good at saving but I am not good at accounting for the balance money."

"The best way to deal with this", says Kartik Jhaveri, "is routing all your financial transaction to be made through credit cards. Allocate one specific credit card for a particular expense. This way, it is easier to track as it allows you to check your monthly statement online as and when you require."
Another way is to do a backward calculation. Out of your total income, 30% would go toward taxes. Thereafter, ensure that:

-Your debts (EMIs) don't exceed 30%.
- You set aside at least 4% for insurance.
- You invest at least 15%.

That leaves around 20% for expenses. Any expense over and above 20% should be flagged as over limit.

Emergency fund, er...what's that?
Think you don't need one? Well, the Mumbai floods (of July 26, 2005), were not anticipated either. Ill health and job loss are also common emergencies. So set aside some money for an emergency. Roughly three months' salary can be kept in a liquid mutual fund so that it is accessible in emergencies.

Retirement? I'm still 20 years away!
Divya admits, "I have not given a thought to my post-retirement financial needs." Well then, this is the best time to plan!

If Divya spends Rs 6,000 per month or Rs 72,000 per annum today, at an inflation rate of 5%, that would be Rs 3.11 lakh per annum after 30 years.

Post retirement, her regular income stream would stop and she would need to make sure her investment income can generate that amount. Of course, expenses like healthcare and medical would shoot up too by then.

Retirement planning is best done at an early age. By setting aside small sums every month and investing them in equities, Divya can meet her retirement needs.With this new strategy, Divya can easily keep a track of her money and she can also invest in products that will give her good returns.

It is time to bury your bad money habits and supplant them with effective and logical money habits.