Tips to become RICH January 30, 2006
No matter which life stage you are in, you have a future ahead of you and you should not leave it to chance- you must plan for it. So what are your financial goals? Here's a tip: "making a lot of money fast" is not necessarily a reasonable goal. Look ahead and think of when would you incur major expenditures. When you think of your goals, you should think about your hopes and dreams, for yourself and your family. What do you hope to achieve in life? Possibly buy a home and send your children to college? Or maybe you'd like to retire early and travel the world? And now compare the future dream with the current reality. Here are a few tips for planning for a secure future: 1. What you earn, what you spend The first part of allocating your investments is to figure out what's there to allocate. 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). This will help you see your monthly disposable income -- 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. 2. Set your goals Financial professionals often counsel investors to write down their goals. Their intention is not to make you ponder the meaning of life, but to help you create the best plan to reach those goals along the way. There's another benefit that comes from identifying your goals. Saving and investing just for the sake of getting rich might work for some people. But for most others, though, giving up Rs.5000 every month can put a strain on their wallets - until they look at a photo of their children and remember that the Rs.5000 they're investing now will go toward helping pay their kids' higher education fees later. 3. Budget for it After you identify your goals and how much you need to reach them, you should begin setting aside money on a regular basis to invest in your plan. Saving on a regular basis is the key to reaching your goals; no matter how little the amount you start out investing. Don't be discouraged if your goal seems large and unreachable - remember that even a leaky faucet can fill your sink with water, drop by drop. Making investments on a regular basis, even if you can only set aside a small amount each month, can eventually build a sizable portfolio. Many people think that they can't spare any cash to start an investing plan. These people probably have not learned the importance of paying yourself first. Setting aside a small amount for your long-term investing plan each week or each month before you pay any other bills or expenses is all you have to do. 4. Spread your money It's rarely a good idea to have all your eggs in one basket. Depending on your goals and attitude to risk, you should invest your money over different investment options such as Stocks, Mutual Funds and Bonds. You may also want to diversify within each of these categories. With stocks, for example, a mutual fund will invest your money in a variety of companies but you may want to ensure you have a range of industry sectors too. 5. Make sure your money grows Should you leave it in the savings bank account and earn a meager rate of return? Or should you invest it in the PPF? The fact is that investing your money in the so-called safe fixed income instruments like Fixed Deposits, PPF, NSC, etc. is simply not enough. This is due to the low rate of return on such instruments and high inflation rate in the economy. It is your hard earned money and you should invest it in instruments, which will make it grow over time and thereby build capital for your future. Stocks is known world over for its potential to increase in value over time and provide your portfolio with the growth required to help you meet your long-term goals. Mutual Funds have given investors a whole new avenue for investment as per your risk appetite and expected returns. 6. Keep track of your track record After you invest, you'll want to keep track of how your investments do. This doesn't mean you need to watch your returns on a daily basis (doing that can be like weighing yourself every day when you're trying to lose weight -- it won't help you judge long-term results, and you can drive yourself crazy doing it). Instead, establish a regular timeframe for checking your investments to see if they are matching or beating your goals. For example, you may decide to review your returns investments once every three months, or twice a year. While benchmarks aren't the only way to judge the strength of your investments, these tools can help you gauge how your investments are doing compared to similar investments. You may use the following benchmarks: Market indices -- such as Sensex, Nifty. This will help you compare your performance with the overall returns of the market Mutual fund benchmarks -- AMFI (Association of Mutual fund in India) has certain benchmarks for various categories of mutual funds. Personal benchmarks -- you can set an overall goal -- for example, for your investments to outpace inflation by 5 percent over a period of five years -- and use it as a benchmark. Be sure to set a reasonable timeline over which to compare your investments to a benchmark. You want to know how your investments perform through market ups and downs, so a longer timeline is more telling than a shorter one. For example, a five-year comparison will tell you more than a six-month comparison. If you find one of your investments under-performs over the short term (for example, under-performed its benchmark over the last three months), don't be hasty to sell it earlier than you planned unless you've lost confidence in its long-term potential. 7. Don't lose your balance You've established a portfolio with an asset allocation that suits you, and are reviewing your investments' performance on a regular basis. Think your work is done? Not quite. You should still sit down periodically -- such as once a year -- to review your goals, finances and asset allocation. After all, goals can change. Time and circumstances can shift your priorities and your comfort with risk, changing your ideal asset allocation. When this happens, you may need to make changes to your portfolio. Even if your ideal asset allocation hasn't changed, review your portfolio to make sure your existing asset allocation is still what you planned. Sometimes your asset allocation will change through no action on your part due to market movements. When this happens, your portfolio is out of balance -- which can expose you to more risk than you intended. How can you fix it? You might sell investments in one asset class or buy extra shares of investments in another class. When should you be on the lookout? If you're like most people, once or twice a year is probably often enough to see if the asset allocation in your portfolio is still what you'd planned. But be sure to also check when you go through a major life change, such as getting married, having children, changing jobs or retiring. When you go through a big change, examine both your existing and your planned allocation to make sure both are right for your new lifestyle and risk tolerance. Just keep these seven steps in mind and you should be able to achieve all your goals. Happy saving! The author is CEO and MD of IDBI Capital. 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