We are already past a month in 2022, and time flies. But, the good news is that financial planning is a long term journey, and you are not late. The perspective is life, and that is the period under consideration. However, every day is vital as every moment contributes to wealth creation. So, start now if you have not done it already. In other words, there are advantages of starting early, and we will elaborate on the benefits of it. So, are you looking for financial success in 2022? Here is how to set yourself up and all that you should do.
Early investing and the power of compounding
Let us first understand the benefits of early investing, as this is an important concept. To summarize, early investing is about the power of compounding. It is a straightforward concept.
Assume that you invest Rs 10,000 once a year at a 9% annualized rate of return.
The total amount of corpus accumulated at the age of 60 will reflect the power of compounding. Why 60? It is just a number, and we have assumed that to be the retirement age. However, you are free to change this assumption.
So, continuing with the example, an investor who started investing at the age of 20 Yrs accumulates a significantly larger corpus than those who began later. And the difference in returns is not linear. That, essentially, is the power of compounding.
The table below demonstrates various outcomes:
|Entry Age||Years of investing||Principal invested||Corpus Value (at the age of 60)||Corpus / Principal investment|
|20 years||40 years||Rs 4 Lacs||Rs 33.8 Lacs||8.4 times|
|30 years||30 years||Rs 3 Lacs||Rs 13.6 Lacs||4.5 times|
|40 years||20 years||Rs 2 Lacs||Rs 5.1 Lacs||2.6 times|
|50 years||10 years||Rs 1 Lac||Rs 1.5 Lacs||1.5 times|
A few things to consider:
- Invest with utmost discipline
- Bear patience throughout the duration, especially when the market is volatile
- Over time the average cost of ownership reduces (vs the market value)
- Plan the tax impact
- Learn from the investing experience and develop an ability to understand the external factors
Why should one look for financial success?
Very plainly put, it is to achieve financial independence, aka financial freedom. In other words, this is all about pursuing life goals without worrying about mere sustenance in life.
- Have enough passive income to meet the living expenses comfortably
- Earn inflows from investments when you are not actively engaged in work
- Generate more than adequate cash flows to meet wishes beyond just meeting the household fund requirements
Above all, it is critical to understand that achieving financial success is a way of life. It is not a one-time goal.
What should you do to attain financial success in 2022?
After the required digression and building the preface, let us pivot to the original topic.
Optimize your retirement contribution
This step is easy to achieve. The provident fund (PF) contribution occurs monthly as per the statutory requirements for salaried investors. In addition, the investors can further increase the retiral savings by further investing in the National Pension Scheme (NPS) or Public Provident Fund (PPF). Investors can voluntary contribute to the Provident Fund as well. Any incremental tax benefits accrued via these investments are additional advantages.
Self-employed investors should consider investing in Public Provident Fund (PPF). This option mandatorily locks in money and earns a modest risk-free return.
Investments in retiral benefits should be in the range of 5-10% of the total income.
Plan your tax costs
Tax is an expense that everyone incurs. If not planned well, tax costs may lead to a significant outflow and make a dent in your savings. Therefore, always make investment decisions by keeping the tax impact in mind. Any arbitrary selling decisions will bring along adverse tax outcomes.
Further, it would be best to avail the maximum possible tax deductions as per the statute. Here are a few most popular exemptions for your reference is as under:
- Section 80C, subject to a maximum of Rs 1.5 Lakhs per annum.
- Investment in mutual funds and pension plans specified under section 80CCC
- Avail benefit of up to Rs 50,000 per year under section 80CCD by investing in the National Pension Scheme
- Get the health checkup done and pay for your health insurance. After that, avail deduction under section 80D
- Contribute to the society you are a part of and claim exemption of your donation under section 80G
- Take appropriate deductions under the section of income from house property
Read more about optimizing investments while saving taxes.
Contribute to your emergency fund
The emergency corpus helps you tide over any financial distress in an unfortunate event, such as job loss, unplanned medical expenditure, etc.
The majority of the outflows do not change with changes in your circumstances. And often, there is no postponement or relaxation. In other words, this emergency fund will help you meet the immediate financial requirements.
How much should be the emergency Corpus? It should be approximately 12 to 18 months of living expenses.
Learn from your expense statement
We earn to live – and spending on maintaining the lifestyle we deserve is necessary. However, over time we often lose track of where we spend, and it may be a good idea to reflect once in a while.
Therefore, we recommend looking at your bank and credit card statements. Pick statements for at least the past six months, and glance through the same. You will discover line items that will intrigue you, of course, in hindsight. These could be interest costs, late payment charges, subscriptions you do not need anymore, purchasing an unnecessary luxury item, etc.
The idea is to not go into the past where you cannot change anything. The idea is actually to be aware and learn from the past and mend the future. In other words, this process is to make you more mindful of your state to expenses. And eventually, stop any pointless outflow as every penny saved is equal to a penny earned.
Review investment portfolio
It is an appropriate time to review the investment portfolio and make necessary changes. Moreover, the time is apt as the stock markets have touched all-time highs. Read more about the strategy when the stock markets are at an all-time high.
Given the growth in share prices, there could be a need to rebalance the portfolio. For instance, assume your target investment split into equity and debt is 60%:40%. However, equities have grown by 25% during the last few months, while the debt bonds values increased by 5%.
You invested Rs1,00,000 at the start of the year in the target proportion, i.e. Rs 60,000 in equity and Rs 40,000 in fixed income instruments (debt). Equity value grew to Rs 75,000 while debt portfolio increased to Rs 42,000. Therefore, the actual equity to debt ratio has become 64%:36%.
In other words, there is a need to reduce equity exposure in line with your target split. Therefore, you need to rebalance the portfolio, i.e., exit portion of equity investment and increase fixed-income assets. But, of course, keep in mind that rebalance action could mean profit booking. Hence, it may have a tax implication.
Above all, if you have not taken the first step to make a financial plan, start now. Make a financial plan which suits your requirements and is per your priorities. Read more on how to make a financial plan by yourself.
Assess the insurance needs
Medical expenses knock on the door, most when unexpected. In other words, you are often not left with any time to manage financial resources. A Mediclaim policy comes to the rescue under such circumstances.
What is a Mediclaim policy? It is an agreement between two parties, the insured (which is you) and the insurer (the insurance company). Herein, the insurance company promises to pay directly or reimburse the costs incurred for treatment. However, the maximum payment or reimbursement is limited to the total policy value.
There is no scientific way to compute the ideal sum assured for an investor. Several factors affect the amount of medical insurance one must take.
However, we can make a theoretical attempt. The suggested sum assured is lower of the two – (a) 50% of primarily members’ annual salary or (b) total treatment cost of one acute disease at a hospital of your choice.
Term insurance is the most conventional form of insurance, ensuring your family’s financial independence in your absence.
For investors who have dependent parents, spouses, children, or siblings, it is essential to subscribe to a term insurance policy. Of course, there is no direct return from this policy. But, that is not the objective either. What entails is the arrival of insurance funds (i.e. sum assured) in case of loss of life. Read more about term insurance and how much term insurance you should buy.
In conclusion, the advent of a medical emergency can generate an unprecedented hole and derail your savings plan. Similarly, the death of the primary earning member can leave the surviving members financially dependent. Therefore both types of insurance are equally important, depending on life stage and circumstances.
Pay off debt (or reduce the interest cost burden)
Interest on a loan is unnecessary on your profit and loss statement. The loan could be for anything, like meeting a short term need, buying a consumer good, or something similar.
Your target should be to pay off the debt as soon as possible and eventually save the interest costs. Therefore, the start of the year is the best time to plan the repayment schedule, as many receive a performance bonus this time. You can use the bonus proceeds to pay off the debt.
Of course, all the debt is not the same. Good debt can be cheaper, and you can solve something significant with that money. In that case, the treatment should be different. For instance, housing loan interest brings along tax exemption. Therefore, it would be best to plan for debt (and debt retirement) based on each loan’s factors and merit.
Prepare for the worst
The least the past couple of years has taught us is to always remain prepared for the worst. We all need a backup plan.
Step zero is to list down all the investments, assets and liabilities. Also, critical is to list down the annual outflows and their expected dates. Of course, it does help you earn, but it allows you to remain abreast. Once you have done these, here are the next steps.
First, nominate and update beneficiaries in your accounts and investments. Second, draft a will by engaging with a lawyer or financial advisor. Read more about the essentials of a valid Will in India here. Third, start working on a secondary source of income. Finally, engage with family members and share relevant details. Read more about sharing financial secrets.
Believe in investing
The base assumption we applied so far is that you believe in investing and financial planning concepts. You are welcome to read more about financial planning for beginners to get yourself started.
Through investing, you set aside money, put it into something that grows in value (capital appreciation) and generates return (dividend/interest). There are many ways to make investments. For instance, buy mutual funds, purchase equity shares, subscribe to gold ETFs, etc.
We touched upon creating a secondary source of income earlier in this article. What that essentially means is to have your investments earn for you. In other words, making suitable investments is the best way to grow your money.
There is a flurry of investment options, and you must choose wisely amongst the available options. Therefore, do not hesitate to research a new idea. However, those who find this process too intimidating should restrict exploring the time-tested investing methods.
Get into an auto-pilot mode to achieve financial success in 2022
We all have the best intentions to achieve financial success. The self-promises are from the heart, especially while taking new year resolutions. However, things begin to fall apart despite the best intentions as days pass. The best way to address this prevalent problem is to get into an auto-pilot mode, especially regarding investments.
Make an investment plan and SIP your way into the future. A Systematic Investment Plan (SIP) is the best mechanism that ensures disciplined investments happen from your account. There is no discretion, and money moves from the savings account to the investment.
There are many benefits of a Systematic Investment Plan (SIP). Firstly, you can make small investments. Secondly, the outflows get split across many months. Thirdly, the cost of ownership gets averaged throughout ups and downs in the secondary market. Fourthly, professional money managers deploy strategies to earn for you. And finally, there are dozens of choices available, so you will always find an option of your choice.
Set aside funds for the other priorities like insurance, tax investments, etc. You can park money in short-term recurring deposits or liquid funds until the outflow happens.
In conclusion, finance is the way of life and achieving financial success is only possible when you start. It is never early, but it is never late either. Your journey is no different – people have started at various junctures in life and succeeded as well. Also, never hesitate to connect with your financial advisor.
We wish you financial success!
About the author
The author is a senior finance professional with over fifteen years of work experience in corporate finance. He has an affinity for matters relating to personal finance and investment management. The author wants to share his knowledge and understanding of the subject through his writing.
The author has used his knowledge, experience, and understanding of the subject and has exercised extreme caution to avoid possible mistakes. However, the author does not take responsibility for any error that exists.
The article’s views, opinions, and thoughts belong solely to the author and not necessarily to the author’s employer (past or current), organization, committee, or other group or individual.
Under any circumstances, the author shall not be liable for any views or analysis expressed in this note. Further, the opinions expressed are not binding on any authority or Court. We advise readers to consult their financial advisor for assistance in their specific case.