How and when to invest, spend and save ?

If you could achieve your financial goals by simply putting money away in the bank or buying gold, you wouldn’t need a financial plan. Unfortunately, life is a little more complex.

We have discussed two steps of financial planning in previous article. First is to know where we are and second is to know where we want to be. The next step is how and where will you save, invest & spend to get there. Savings include identifying the unnecessary out go of your income which you could retain or avoid spending. Tax planning falls under this category. We will talk about it later in the upcoming blogs.

As per the World Bank data for 2013-14, India has saving rate as high as 30% unlike US and UK of avg 17%. But most of us hardly know about investment beyond Fixed Deposit and Gold. While we invest for future goals we need to keep in mind few things.

Suppose today you think that you will require Rs.10 lac for your child’s post school education than ask yourself again that would it be a sufficient amount 5 or 10 years down the line?(or according to your timeline).In developing countries such as ours, inflation levels remain quite higher. Prices for education, luxurious expenditure such as in marriages tend to increase way above the rate of inflation. So you need to think that whether your investment is good enough protect you well against such inflation or not?

A qualified financial planner can help you allocate your money in to diversified funds which helps you minimize your risk and maximize the returns.

Now the question is how much money should you invest in which asset class? Well, there are several types of portfolios such as Aggressive, conservative, balanced, regular income etc.

Aggressive portfolios invest in high risk assets or high risk ,high return stocks. You can afford to invest in aggressive portfolios when your goal has long time horizon. In a long run such portfolio gives good returns.

Conservative portfolios is one where return is limited but risk of downside is very limited /nil. When your goals are very near, your concern should be to protect your funds rather than earning more than average returns by taking more risk. Such portfolios invest in secure instruments such as government bonds, money market etc. Liquid funds offered by mutual funds are very good option in very short terms.

Balanced Portfolio includes combination of debt and equity both. Percentage allocation between debt and equity is done based on one’s risk appetite on medium term goals.

Once the asset allocation is done, your financial planning is not over. You need to keep on reviewing your portfolio ideally twice in a year at least. There are many factors that affect your investments such as political situation, economic condition, global scenario etc.

It is also advisable to shift your investments into more secure options such as fixed deposits as you reach closer to your goal. Suppose one person has invested balanced or aggressive portfolio with a view to withdraw it for his child’s education 15 years later. Then he should gradually start shifting his investments in to fixed assets 3 years before his target. If economic downturn / recession happen to occur near his investment withdrawal target then you could lose a huge portion of your return (sometime principal amount).

The case is same for real estate investment. You should realize your profit before 3 to 4 years. In greed of earning more you may not be able to withdraw the profit on your investments if a downturn hits the market. May be you will sell your assets for less than it’s worth.