BackWhy investing without goals will hurt
Having a budget and saving is not enough; one also has to ensure that it was created in line with life stages
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Do you feel a small thrill of satisfaction of having done things right when you come across discussions about how to manage your money? Before you pat yourself on the back, take a minute to make sure you are not being lulled into a false sense of security. Take a second look at your money matters and make sure you are free from these wrong impressions you may have about your financial situation.
Living by a budget
You may have a budget in place and trying to live by it. But having a budget is not a guarantee that you will be able to save the money you need for your future needs. Do you find yourself straying from the budget very often and wondering where the money went? This may be an indication of the fact that you have gone wrong with the budgeting exercise itself and may not be saving as much as needed. The most likely causes for your inability to stay within your budget may be that you have underestimated your expenses or overestimated your income. “Keeping a track of expenses is important. People overshoot their budget when they don’t take into account unforeseen risks. Ensure that you pay yourself first by saving a portion of income in a separate account," said Dilshad Billimoria, director, Dilzer Consultants Pvt. Ltd.
You should estimate how much you need to invest after considering the returns that you are likely to earn. On the other hand, arbitrary investments are likely to fall short of your needs.
Check if you have overlooked small expenses, or forgotten to budget for unexpected expenses. Correct that so that you are able to save for your future goals.
Investing regularly
Seeing your bank balance swell each month as you save may be gratifying, but it may not be helping you meet your goals. The money has to be invested to earn returns and work for you. You may feel that you have done your bit by saving. But your goals will not benefit if the money you have saved with discipline is lying in a low-earning savings bank account. To contribute to your financial wellbeing, this money has to be invested too.
Investment products should be chosen according to the stage you are in life. “During the age of 25-35 years, investments should be for growing your assets, 35-55 years for accumulation and 55 years-plus should ideally be for consumption of assets. Therefore, asset allocation would vary accordingly," said Prateek Pant, executive director, products and services, RBS Private Banking.
Invest according to goals
You have been zealous in your efforts to manage your money and have begun investing. Every year you make sure you do your tax-saving investments. You have signed up for regular investments in mutual funds, and invest in bonds and fixed deposits. You are also open to stock tips from friends and relatives. You would be forgiven if you thought that you are doing what it takes to secure your future. But is that enough? Not unless the investments are happening to a plan. “Planning a budget gives you proper direction. Without it, you would not be able to meet your end goal," said Billimoria.
Many who have just started working or are in their early 20s do not think about having goals that early in life, while the opposite is true. “It’s never too early to start planning for future. In fact, the earlier you start, the smaller your monthly contribution can be. You could start with as low as you are comfortable with but anything above 5,000 per month will work wonders. Returns earned on the saved amounts over long periods lead to formation of substantial corpuses," said Manish Shah, co-founder and chief executive officer of BigDecisions.com, a financial advisory.
Keep a timeframe in mind for these goals. The strategy for saving for a goal that is say, 10 years away, will be different from one for a longer-term target.
Adequate insurance
You are likely to reply in the affirmative to a question to whether you are insured. But whether you are adequately insured is a different question altogether.
A large premium payout or the promises of a large fund value in the future are not the measure of adequate insurance.
If you do not have adequate cover, then in the event of your death, the needs of your dependents will remain unfulfilled. Look at the sum assured under the policies and relate them to what you need to provide to meet their needs and goals. “There are primarily three types of insurance products—life, health and property. The level of underinsurance is the highest in life insurance and since customers don’t disclose their income accurately and life insurance is about insuring the income earning capacity, it’s difficult to get the extent of under insurance," said P. Nandagopal, chief mentor, OpenWorld Money, a digital financial planning platform for money solutions, and former chief executive officer and managing director of IndiaFirst Life Insurance Co. Ltd.
In health insurance, too, people are underinsured. One reason for this is that medical costs keep increasing but customers don’t buy additional health cover to inflation proof their health cover.
Same is true for assets such as property and personal vehicles. “About 70% of the vehicles are not insured for comprehensive cover. Even though third-party insurance is mandatory, not all vehicles are insured for that. Home insurance is another important policy that sees few customers," said Nandagopal.
In a study among 8,000 users of BigDecisions who used the portal to calculate their level of insurance, it was found that many were nowhere close to what their insurance value should be, said Shah.
Giving control to adviser
Letting others handle your money if you are not able to do yourself may be a good idea. This may be a relative or a friend or even a financial adviser. But will they be able to manage your money to meet your future goals without involving you?
You are asking for trouble if you give up control believing that your job ends with finding an adviser. The money is still yours and you have the responsibility to set the parameters for managing it. If you don’t give clear instructions about your investment horizon, and risk and return preferences, then there is a good chance that your money is not going to be working in your best interests. Moreover, if there is no regular check over what is being done, there is a chance of fraud or mismanagement of savings.
Not talking about money matters is another way of giving up control of your future financial security. Ignorance of the financial situation may keep you artificially protected for a while, but you will have to face the situation some time and it may be too late to take any effective corrective action then.
Review of investments
Listing your investments and their current valuation for filing your income tax returns or a daily check of stock prices may seem like reviewing your investments and may give you a sense of control. But does it help you decide whether you are on track to meet your life’s goals?
The purpose of a periodic review is to assess the performance of investments, check their suitability to the stage of your goals and make changes accordingly. Review of investments should happen periodically, varying from a month to a year depending on different asset classes. While some planners suggest an annual review, others advise a quarterly exercise. A daily review, however, doesn’t serve much purpose.
You have made a good beginning in managing your money matters. Now you need to complete the loop by linking your investment activity to your goals.
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