Financial Planning for Beginners

June is the month, when many campus recruits start with their first job. Sameer Dahane was one of them. While he was excited of a new role, he was equally eager to get his salary so that he can splurge it.

On a casual tea-time discussion with Kapil, his senior, he shared his thoughts on how he plans to buy variety of stuff including an expensive smartphone, an enviable Tab, a luxury watch to flaunt around and so on.

“What are your thoughts on savings?” Asked Kapil.

Sameer: Yes I have a savings account.

Kapil: Great. And what amount you plan to save and invest? Or what % of your salary.

Sameer: I am just 25. Do I have to bother about all these things right now ? Shouldn’t I be enjoying life?

Kapil: No denial that one should enjoy life. But enjoying doesn’t mean irresponsible spending on stuff that is not necessary. You would soon have a family to support.

Sameer: Yes, that’s right! So I was thinking that I would start saving and investing after I start a family.

Kapil: Well, just for your knowledge, it is easier to save when you don’t have to support a family as your expenses are lesser. After you get married, you would be tempted to spend a lot to have a good time with your partner i.e. outings, gifts etc. Let's say, this happens for first two years. Later on, if you plan a child, then you would have expenses related to child care.

Sameer: You are right! Never thought on those lines. So do you I think 25 years is a good age to start saving and investing.

Kapil: I would say, it is the best age. You have time so much on your side. Let’s say that you plan to retire at an age of 58. Since you have 33 years for the same, even a saving of Rs. 10,000 p.m. can grow upto Rs. 4.38 Crores at your retirement age. And if you delay this by even 3 years, your retirement wealth drops to 3.08 Crores. We can say that you will be richer by almost Rs. 1.3 Crores than your colleague Sidharth who is starting at an age of 28.

In fact, you may just have a look at the table below and see the great difference in retirement wealth as you delay your financial planning.

—————————————————————————————–
Investment Rs. 10,000 p.m. till the age of 58
—————————————————————————————–
Your Age (Years) | 25 | 30 | 35 | 40
Time for retirement | 33 | 28 | 23 | 18
(Years)
—————————————————————————————-

Investment amount p.m. | 10,000 | 10,000 | 10,000 | 10,000
Total Amount invested | 39,60,000 | 33,60,000 | 27,60,000 | 21,60,000
—————————————————————————————-
“Retirement wealth
estimated @12% p.a.” | 4,37,16,248 | 2,43,45,569 | 1,33,54,126 | 71,17,286
Rounded Off | 4.37 Crores | 2.43 Crores | 1.33 Crores | 71.17 Lakhs
—————————————————————————————–

Sameer: This is wonderful! It sounds like magic!

Kapil: In fact, this is a wonder! Einstein the great had called it the 8th Wonder i.e. the Power of compounding.

Sameer: But now the question is, how do I manage to save Rs. 10,000 p.m. I would hardly be able to save anything from my salary after my expenses.

Kapil: For that, you need to change the equation a bit.

You are currently doing: Salary – Expenses = Savings

You need to change it to: Salary – Savings = Expenses

Sameer: Sounds nice! But how do I do that?

Kapil: Set apart an amount decided for saving and invest it as soon as your salary is credited. And then try and manage your expenses within the balance amount. Human nature is such, we tend to exploit the resources available. If resources are less, we tend to adjust within them. You may follow a few tips as below:

1. Try and minimize use of credit card. Use of credit card is one habit that encourages spending.

2. Make a budget for your expenses. This may sound like a tough job but do it for 2-3 months and you will have a fair idea of where the money is going. You may not need to do it after the initial few months. Now curtail useless expenses. For example, going to an expensive restaurant 3-4 times in a week. Cut it down to once or twice a month.

3. Save your decided amount first. Put it in an investment account. Take this money out of the salary in the beginning of the month so that you don’t touch it.

4. Stop splurging on sale and discount. You often buy things you never need.

5. Don’t pile up old stuff. If there is an old gadget you are willing to replace, try selling the old one along with buying the new one. This will lower your cost by some extent and also help you get rid of cluttering your house. However, Don’t get fooled by the exchange offers. You hardly get any value for your old one there.

6. Don’t succumb to peer pressure to buy every product that is launched in the market. Many youngsters just buy stuff to flaunt. It might earn you some false brownie points today, but you will be a loser in the long run.

Sameer: Thanks Kapil for awakening me at the right time. I will stop splurging and start behaving responsibly so that I secure my future.

The Author Prof. Saurabh Bajaj (BE, MBA, FRM) is Chief Investment Planner with Nidhi Investments Mumbai. He may be contacted at saurabh@nidhiinvestments.com if you have any questions.

(The views mentioned in the article are personal opinion of the author)