The biggest worry for most people is to secure finances for their future. We all go through the first phase of our working life trying to make ends meet or simply by scaling up our standard of living. By the time we start to focus on building our nest eggs, we realise that we are somewhat late. We perhaps introspect on the past and think what we could have possibly done. We look in to the rear view mirror. Unfortunately, it is too late by then.
Starting early becomes critical, simply because of the power of compounding. For instance, if we were to put money into something that gives us a return of 10 per cent per annum, the amounts would double every seven years. So, if we save for 28 years, we would have 16 times what we started with. However, if we have saved for 21 years, we would just have eight times what we started with. And, these seven years are those that most of us ignore.
I would typically advise the conservative individual, to start with the first salary he gets. In many cases, the first few years of earnings are spent on personal lifestyles. By giving up a few things early on, we can ensure a better life later, when we do not earn.
I would first of all start with the most conservative but certain mode of investment. My first one lakh rupees would go in to a Public Provident Fund (PPF), each year. If possible, I would deposit the amount in April itself. If we can do this for 25 years, we would have a massive amount of around Rs 79 lakh in the end. All of this is tax free.
If this were to be put in to an instrument that gave an annual return of 8 per cent, we would have a monthly cash inflow of around Rs 50,000, with the principal intact.
However, if we save this way for only 20 years, the corpus would be around Rs 49 lakh and the monthly cash inflow would be around Rs 35,000. So, we can see the difference that five years can make.
If we treat PPF as our first line of defence, it becomes easier for us to build on our savings and investment. In fact, we take the time frame from 25 to 35, the sum grows to a phenomenal Rs 122 lakh and at an annual return of eight per cent, we can have a cash inflow of over Rs 75,000 This is compound interest at work.
Here time is important. It is no use starting late and having multiple PPF accounts in the names of self, spouse and children. I would advise most parents to consult their tax advisers and start a PPF accounts for their children at an early age. This is perhaps the best gift one could give them, securing their future. PPF accounts can be opened for an initial period of 15 years and can be extended for five years at a time.
The key for building up the corpus is to ensure that we do not miss out on maximising the contribution to the fullest legal limit every year. I have seen many people missing out on this opportunity to build capital by just putting in a thousand rupees in the PPF account in some years due to diverting their income to something else.
I would think that if we treat PPF contribution as a compulsory expense with the first priority, we can reach this goal.
This takes so much pressure away from us in our later years, when our needs keep increasing. So, if I were to prioritise my savings, I would put the first one lakh rupees into a PPF account. My next would be take a term policy for Rs 50 lakh to a crore of rupees, at an age as near to 18 as possible. Eighteen because that is the minimum age at which such a policy is made available.
At this age, the annual premium is locked in for life at under Rs 10,000 for a crore of rupees of life cover! Treat this as an essential expenditure.
If you do not have a medical insurance cover from your employer, then take one at an early age to get the benefit of locking in to lower premiums.
Also, even if we have a company plan, at around age 50 or so, it makes sense to take a personal medical insurance policy.
Of course, this is not a financial plan for you, but it is more of creating a base of financial security for your life.
(The writer is an independent analyst and can be contacted at balakrishnanr@gmail.com [1])
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[1] mailto:balakrishnanr@gmail.com