1. Understand the need to save for the future. Inflation is the biggest demon. Assuming the same standard of living, a bottle of water costing Rs 50 today will cost approximately Rs 120 in 2021, and the same bottle cost us Rs 20 in 2009.
2. Understand the importance of compounding and its benefits in the long run. If your earning capacity increases, the key is to increase your savings potential and not think about that high-end car to look good while driving.
3. Medical expenses are only rising and at a galloping rate, much higher than the rate of normal inflation. One should understand costs of hospitalisation and ensure sufficient independent health cover is bought for themselves and family to avoid a sudden drain on one's finances at times of emotional stress.
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4. Emergency fund: Creating an emergency fund is the first and foremost thing one must set aside in the bank. This fund would help meet contingencies and emergencies like job loss and medical emergency.
5. Getting covered: While building assets and creating savings for the future is important for goals like retirement and child education, one must also be aware of the fact that should anything happen to the main income earning member in the family, the future of the family is not compromised and all planned savings are met for goals. Therefore, adequate life insurance through a term insurance can protect the family against untimely loss of a main earning member.
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6. Live within your means: Creating an asset like a home is good, but taking a loan beyond one's comfort zone or beyond a loan to income ratio of 35 per cent is like putting a strain on the cash flows of the family.
7. Creating budgets for monthly spending and bucketing expenses will help create a balanced spending pattern and also enable planned savings for the future. Ensuring the credit card bills are cleared on a timely basis without delay in payments and carry forward of bills, will prevent debt traps.
8. Keep in mind the simple rule of interest rates on earnings versus interest rates on loans. Interest rates on loans will be higher and therefore, any surplus available should be used to clear debt first if the rate of interest earned on savings is lower than interest paid on debt.
9. Take help: Do what you do best in your work and leave the investing recommendations, strategies and advice to your financial advisor to help meet your goals.
10. Don’t get greedy: The stock market sounds exciting and so does stock picking. But what goes up, comes down and much faster if you are playing the markets, because of so many unknowns.
11. Asset allocation is the basic tenet of building a sound portfolio. Creating a well-balanced portfolio, based on one's risk profile will protect downside risk of any one asset class. Portfolio skew can be dangerous and is caused by behaviour bias or herd mentality.
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12. Discipline and time in the market is more important than timing the market. The market does not move only on fundamentals. Macro and micro factors with behaviour and emotions drive the market and creating a systematic routine for the long term maybe boring and routine, but doing the boring things paves the path for success!
Dilshad Billimoria is the founder and chief financial planner, Dilzer Consultants, a Bangalore-based firm which provides investment advisory and financial planning services
The story was first published in Empower, March 2016
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