I often interact with people regarding their financial concerns. Most of them seem to have a similar set of questions. Lately, I interviewed some experts in the financial domain and presented to them a list the most frequently asked questions. In this article I am going to share their financial insights and wisdom with you.
This is the most common question - from today’s younger generation:
“I am earning about 30K-40K per month. What are the best ways to start with my financial planning?”
Image credit "ShutterStock"
I spoke with this truly amazing guy, Manish Chauhan, who has authored several books on personal finance, and is running a successful blog on personal finance called JagoInvestor.
Manish suggests making three buckets: 20K for mandatory expenses, 10K for fun and splurging, and10K for pure savings. He says, “I suggest this because when a person starts earning, it's the first time he/she gets so much money in his/her pocket and are, literally, overwhelmed. Also, given our culture, kids never have had the freedom to spend a lot of money. Over the years, they keep waiting for the days when they will be earning and spending. So I suggest the bucket of 10k (25 per cent) purely to spend and splurge, for the beginning 1-2 years. Side by side, I have also kept a similar sized bucket for savings. This way they will feel less guilty about spending, and also start cultivating the discipline of saving. Subsequently, they can adjust the size and proportion of these buckets. If all goes well in the first 2-3 years of their earning life, they will accumulate a decent sum of money. I know, in reality, things might turn out to be different, but this is just a basic framework. One can adjust the buckets accordingly.”
I contacted another expert, Vishal Khandelwal, who left his job as a stock market analyst four years ago. He has been sharing his views on value investing through an online portal - SafalNiveshak. He shares his deep and practical insights on money, investing, and human behavior.
Vishal has a seven-point mantra for those who have just started earning money.
I posed the same question to the Founder of Valuefy and TheFundoo, Sharad Singh. He has experience of over a decade in the financial domain. His ventures provide portfolio management solutions, and help individual investors make correct investment decisions by bringing institutional level analytics to the realm of the common investor.
Sharad suggests maintaining a balance between saving and spending. He speaks in a tongue-in-cheek manner, “Congrats. Work Hard. Have Fun. Make it big. But also start adopting the habit of saving. Perhaps, one may not have any goal in mind at the present moment, so putting away 4K-5K every month in an equity mutual fund is a good idea. One should get to a saving rate of about 25 per cent over a period of time. Don’t be stingy. Living life to the fullest is important, and spending money is a part of it. A balance is important.”
I also sought the views of Sanjiv Singhal, Founder of Scripbox. Sanjiv has worked in finance and technology for over 20 years, and has helped people in wealth management.
He says, “Start saving right away – approximately 30 per cent of your salary. Buy term life insurance, if you have people who depend on your income. Invest your money in Equity Mutual Funds - start with tax saving ELSS funds and once the 80cc limit is exhausted, invest in diversified equity funds.”
Finally, I got some insights from Vipin Khandelwal , who has worked for over a dozen years in business and financial analysis, financial planning, education, and running an online business.
Here’s what Vipin has to say, based on his experiences. “A lot depends on the needs of the person. When I started earning early in my career, I could hardly save. There were a lot of demands on the money. But one thing that definitely needs to be ensured, and I did, was to buy relevant insurance. I bought a term insurance plan for life-cover, and Mediclaim for emergency health expenses. If one still has money left over, one should start a Systematic Investment Plan (SIP) in a mutual fund scheme.”
The next most important question that is on the minds of the young generation: “When should I buy a home?”
Vishal Khandelwal suggests buying a home when you plan to stay in it, and ensure that the EMI is below 40-50 per cent of your net take home pay.
He adds, "If you can stretch it a bit, while keeping your EMI within this level, buy a bigger house than you need now. If you think a 2BHK would be sufficient for now, if your income allows it, buy a 3BHK instead. You’ll need a bigger house when your family grows in the future (talking purely from my personal experience). But don’t let the EMI burn a big hole in your savings. The maximum outflow should be 50 per cent.”
Manish Chauhan, too, has thoughts along similar lines,
“In most of the scenarios, family members (esp. spouse, parents) influence the house-buying decision. So even though a person is not a hundred percent financially ready, he or she still has to bite the bullet, and somehow arrange the money from here and there to oblige the family pressure. Though this appears to be difficult, in real life, most of the people do manage to arrange the money. While this might look bad, at times though, it is a blessing in disguise, because if there was no pressure, the person might never have come out of his or her comfort zone and bought the house.
From a numbers point of view, one should ideally have accumulated around 40-50 per cent of the down payment cost. This would keep the loan amount to a reasonable number and make it is easier to pay back. I have seen a lot of people taking a loan of about 80 per cent of the cost of the house, and then fretting too much over it. I think 3-4 times of your take home yearly salary should be ideal loan amount.”
From Top Left - Manish Chauhan, Vishal Khandelwal, Sharad Singh, Sanjiv Singhal, Vipin Khandewal
Sanjiv Singhal recommends waiting till you turn thirty to buy a home.
“I always use the word 'home' and not 'house' to avoid thinking of it as an investment. I recommend buying a home after thirty when you have achieved some sort of stability in your personal and professional lives. But you should start saving for the down payment much earlier. The discipline of saving 30 per cent of your salary prepares you for making the EMI payments as well.”
Vipin Khandelwal offers his views, “Buying a house is a huge financial burden. In my view, one should buy a house that has an EMI which does not exceed 40 per cent of the monthly take-home income. It is as simple as that. Also, your credit rating (as provided by CIBIL) has to be high enough, preferably around 800, to get you the best interest rate.”
So, as you can see, every financial expert suggests keeping your home EMI to within 40 to 50 per cent of your monthly take home salary. Don’t ignore this advice when shopping for a house.
Here’s the last question I asked them:
“If I have 1L to invest for 5 years then what are the best options for me?”
In response, the experts seem to have a common voice on this one.
Vishal says, “Without a doubt; equity - either directly or through well-selected mutual funds. I am assuming you don’t need this money for the next five years, and that you have money kept aside for emergencies, etc. This is the money on which you are willing to take a risk for the sake of earning higher long-term returns.”
Vipin also prefers equity, through the route of mutual funds: “Mutual Funds give easy access to a wide range of investment options. You can buy into almost any kind of portfolio, based on your risk taking capacity. It will be good to know that some balanced funds (which invest equally in debt and equity) present a reasonable investment opportunity, especially if you are investing for the first time.”
Manish prefers a combination of equity and fixed deposits. He says, “Five years is a good enough period to qualify as medium term. I would personally prefer a debt fund with a higher equity allocation - of around 30-40 per cent. I feel assured that my investment is safe in debt funds. It does have an equity component to boost returns, and there is also savings on the taxation side. However, for someone who wants to save tax and yet keep things simple, he or she can choose a tax saving Fixed Deposit.”
Sharad, too, voted for equity, “I would invest 1L into an equity-focused fund and review rebalancing the asset allocation in the fourth year. For a common investor, 75 per cent equity should be good in current markets for five years.”
I asked this question, slightly differently, to Sanjiv. I asked him why everyone suggests mutual funds as the preferred investment option.
He said, “A number of things make mutual funds the right investment avenue: professionally managed at very low cost, tightly regulated to keep your money safe, easy to invest/withdraw, and an option to invest in multiple asset classes depending on your investment horizon. Equity mutual funds for 5 years plus, but debt mutual funds, offer a good alternative to an FD or even a savings account. People sometimes suspect that I recommend mutual funds because that's what Scripbox sells. It's the other way around - Scripbox sells mutual funds because that's the right option.”
I hope this article has helped in educating and informing you about your financial well being. I have also written 21 lessons for young adults - it is a good checklist for your financial health.
Note: Views and opinions in this article are purely of the persons who were interviewed.