Financial insecurity can be a big reason for stress while working towards financial security is always in the future. The thought process is contradictory, but that is the truth. To inch towards securing a better future must be the thing of the present. There is no right age to start building a financially secure life. We often observe that there is too much information, and that confuses people. Especially those with less interest in finance find the heaps of information overwhelming. Therefore, here is our attempt to list down ten steps to a secure financial future for your family.
The list is only indicative and based on our research of the subject. In other words, you can certainly modify the course as long as you meet the end objective. Further, your financial advisor might suggest a different approach, which is perfectly fine to adopt if you agree.
Above all, the essence is that the sooner you take steps to secure the financial future for your family, the better it is. An early start lowers the stress during the process. And, in case of any unfortunate event, those who planned ahead of time always have an advantage.
Life is today, and so is the time to secure the future
One of the most exciting questions we hear is whether we should save money now or have fun with that money? Today is the time to live life. But, today is also the time to save money. So should we spend today or save today to spend in the future? However, we hear there is no guarantee of what happens in future. Or even if we will make it to that future date. So, why worry about the future? But then what happens if we reach that future day and fall short of money to survive if we have not saved enough?
Do these questions flash in your mind? Unfortunately, it does for many and quite frequently. In other words, the dilemma is real-life, and you have to decide what to save today vs what to spend today (for tomorrow).
Our assessment tells us that while this is the time to earn and enjoy, today is the time to save as well. That is because inflows will stop one day, and there is no looking back from there. Therefore, you must save today to secure your future, as you will not have this opportunity in future. You can draft an approach that suits your lifestyle. In other words, you can be creative in your slant.
We once discussed the concept of bucketing the goals into long and short-term. That method comes to practical use in this situation. For example, set a short-term target to save for a vacay (the fun part). At the same time, set yourself a long-term target to fund your child’s education (savings part) in any ivy college of choice.
This way, create goals that are a mix of living today and saving for tomorrow. Just remember, the process is about finding the right balance. Above all, the objective is to be fair to your present and future, both simultaneously.
Track your expenditure
Resources are finite – we know that, and therefore, never take money for granted. In other words, since the inflows are limited, you must care for a scarce resource.
We may be repeating this for the thousandth time, but still, at the cost of your boredom, here we state again.
Expenses = residual of income left after making way for all the mandatory savings and investments. Savings is never the income left after meeting your expenses.
Therefore it is critical to make an expense plan, as much as it is to create a savings plan. Expense management is all about seeking value in return for every paise spent. Here are a few tips for managing expenses:
- Split your outflows into discretionary vs non-discretionary. The awareness of this distinction helps in case you ever plan to control the spend
- Create a budget with ballpark figures. The intention is not to spend time on each expense item but rather to know your outflows. As it is said, the idea is to learn while creating a budget. Like your credit card invoice is expected to be in a specific range, so when it is not, your mind sends triggers.
- Look for the best deal when incurring expenses—for instance, travel, entertainment, home furnishing, etc.
- Spend cautiously on luxuries and avoid impulsive purchases
- Be sensible when using credit, especially when plastic money is easily accessible
How much should you save?
Simply put, your investment goals will help you determine the savings amount. But, how do you know if what you are saving is enough? Here is a table that will help answer this question.
|Up to 25 years
|26 – 35 years
|36 – 45 years
|46 – active earning age
Treat the above as a rule of thumb and a minimum threshold. Then, based on your circumstances, feel free to modify (read as increase) the savings-to-income (S2I).
Know your means, and respect your limits
Cut your coat according to the cloth – heard about it? That is precisely the message here. In other words, it would be best to keep your standard of living below what your earnings can afford.
As you progress in your career or business and your income rises, the limits will also revise. However, the pace of expansion in expense should always be slower than the pace of your income growth. This prudence will provide you with an edge to fast-pace the achievement of your financial goals.
Needless to say, if the speed of your expenses outgrows your income, you will have to compromise on your financial goals. You may have to utilize the emergency corpus for living expenses, which is disastrous. Therefore, always know your means and respect your limits.
Never live on borrowed funds
First, you should make all possible efforts to avoid debt unless you can use debt to your advantage.
Second, if you have to avail leverage temporarily, pay back the same the soonest. Examples of high-interest rate leverage include loans taken to purchase consumer durables, personal loans, credit card loans, etc.
Finally, you will have to avail of a loan for some instances. For example, purchasing a house, funding your business, paying higher education fees, etc. In such cases where debt is unavoidable, ensure that you optimize the interest cost. Avail of the maximum tax advantage and reduce the tax burden. And eventually, make all attempts to pay the loan and save the interest costs.
Outlays on interest costs can obstruct your financial growth. A well-defined debt strategy can serve the purpose, but an unplanned loan can disrupt the plan. Interest is a cost and a deterrent that impacts savings, and hence you must watch for it.
In conclusion, avoid debt, but if you must avail it, use it to the best of your advantage and get rid of it as soon as possible.
Set yourselves financial goals
Begin with the end – this short statement is of immense importance. In other words, investors must understand what they would like to achieve from the financial planning journey.
Knowing the financial goals helps make an efficient plan and optimize the available financial resources. Further, once you have set the outcomes (or goals), it is critical to tag investments to each target.
The key to success is to be specific in goal setting process. An open goal is non-comprehensible, as you cannot act on the same. For instance, a goal like ‘I want to save for my daughter’s education expenses’ is meaningless. Why? Because some of the many critical questions remain unanswered – like in which year is money required? How much money? Is the outflow one-time or across years? How flexible is the goal? Etc.
These unanswered questions will never allow you to make a plan that you will be confident of achieving. In conclusion, a goal without specifics is a dream that you hope will come true one day.
Read more about financial planning for beginners for detailed know-how on the steps.
Boost your financial literacy
Do you not like talking about finances? Is it not your cup of tea?
Unfortunately, being clueless about financial progress can be immensely detrimental. Therefore, you must make an effort to know and understand the finances.
You may not be able to catch nuances, but you must distinguish between right and wrong. And there are many reasons why we insist that you boost your financial literacy.
First, a plethora of information is available on financial planning in the public domain. You must filter out meaningless information and focus on the relevant information with your knowledge (even if limited).
Second, a basic understanding of goal-setting methods will help you set meaningful targets.
Third, you have to assign investments to your goals and divert your savings appropriately. Working knowledge of financial products, investment asset classes and their returns, etc., will place you in a comfortable position to make decisions.
Finally, we know that no plan is perfect. During your investing journey, you will make several financial decisions like where to invest, when to exit, when to rebalance the portfolio, modify asset allocation, etc. Your financial knowledge will help you in decision-making.
Plan for your retirement
One of the most critical objectives of a financial plan is to fund your non-earing years of life. In other words, the retirement phase of life.
The ultimate objective is to accumulate a corpus to serve your retirement. Therefore, there are two crucial actions here – 1) how much to accumulate and 2) how to accumulate.
You begin by forecasting the savings through the active years. Also, determine how much money you will divert to the retirement-related fund creation. Finally, evaluate options to invest the balance savings in accumulating the desired retirement corpus.
The retirement planning process deserves your focus because it involves considerable money. Similarly, a general understanding of economic factors like inflation, interest rates, etc., is advantageous. Although these may sound trivial, even a marginal change can significantly affect the corpus. Therefore, it is essential to crafting a retirement plan carefully.
Inflation reduces the actual value of your money. Therefore, always think inflation plus returns; otherwise, you will have negative ‘real’ returns.
Optimize your taxes
Simply put, tax costs are unavoidable. Although while you can optimize these costs, tax costs can be costly if left unattended.
Naturally, any incremental cost incurred on the tax account is a dent in your savings. Therefore, you must approach investment decisions with a tax lens put on. Any hit-or-miss selling decisions will bring adverse tax outcomes and lead you to pay higher taxes. In other words, it leads to reduced profits.
It would be best if you availed of the maximum possible tax deductions. Here are some of the most popular tax exemptions for your reference:
- Section 80C deduction subject to a maximum of Rs 1.5 Lakhs in a financial year
- Tax exemption under section 80CCD for investment made under National Pension Scheme (NPS), capped to Rs 50,000
- Costs incurred for health insurance premium under Section 80D
- Donations made to charitable institutions are exempt under section 80G
- Exemptions from the income from house property
- Deduction of house rent paid from taxable income
Read more about optimizing taxes and available tax deductions in our earlier note.
Maintain adequate insurances
Moreover, create an emergency corpus, which protects you during any exigency that demands financial resources.
While the term and health insurance are the most popular options, several other insurances are also available. And, it may be worth evaluating them for your purpose – for instance, motor insurance, property insurance, business insurance, etc.
Take calculated risks – you will never know until you take it
All this while we have spoken about safety, security, and savings. In other words, a defensive mechanism. In essence, we do want to stick to that approach, as there is only one way in the financial planning journey. However, being defensive does not mean you cannot take calculated risks.
Here are some instances of the kind of risks that you may take:
- Spend time and money by going back to school to train yourself on matters you lack. For example, take a course (and spend money) to uplift your financial knowledge
- Be mobile and move cities to grow in your career – this, of course, depends a lot on your background and personal commitments
- Invest a portion of your savings in risky assets, depending on your age and risk appetite. We do not recommend any reckless investments, but it is okay to take a risk for a portion of your investments
- Be confident in your research and follow your gut; you will undoubtedly gain money or experience, or both. And this will help you grow as an investor.
Remember, as you age and assume more responsibilities, the risk-taking capacity reduces. There is, of course, no linear relationship, but usually, that is the trend. It is easier to take on more risks when you have fewer responsibilities.
To successfully secure a financial future for your family, you must first know very clearly why you are saving and what you want to achieve. The road will always be bumpy unless the objective is clear, and the destination will be far.
Second, make a plan and stick to the same. Then, if there are hiccups, adjust and get it going. Do believe in your capability and the help you have taken during the process.
Third, always pay yourself first. The advice may sound selfish, but this is the objective you must gun for through a well-thought savings and investment plan.
Fourth, do not leave money on the table – every penny counts. Take this mindset in all the transactions you conduct, and you will be surprised with what benefit this attitude brings. Of course, we do not recommend being penny wise pound foolish. But, as savvy investors, we believe you will make intelligent decisions.
Finally, love numbers; they will love you back. In case required, do not hesitate to connect with a financial advisor.
Here’s wishing you a secure financial future!
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.