When it comes to investing, at first many of us don’t know what to save for. Then we start learning more about money and investing, especially in the context of our own lives.
The many financial needs, most of which come to light when we start our families, bring to attention a different kind of problem. We realise we have many financial goals but not enough in the way of earnings to save for these goals.
A real challenge
In a country, where just 1.6% of the total workforce earns more than Rs 50,000 a month, finding money for most of our financial goals is a big challenge. For example, most of your early savings might go just towards financing an emergency fund. Once you get married, setting up the house and saving for your first home might take precedence. When children arrive on the scene, your savings come under even greater pressure. Some of the goals you might have at this stage would be in order of when they need to be fulfilled as well as how critical they are:
1. A bigger emergency fund than the one you had when you were single
2. Saving for a home purchase down payment
3. Children’s school fees
5. Children’s college fees
6. Retirement kitty
It’s a given that immediate unavoidable expenses will take precedence. No matter how much we want to save, we are limited by our spends. Also, to be fair, many of these spends are compulsory spends, such as school fees or car loan and home loan EMIs, that can’t be negotiated away.
In such a scenario, saving for even a single goal seems like a stretch. So, what can you do?
Some goals are more important than others, simply because they can have an impact on your health and safety as well as security of your family. Here is an approach you can take.
1. Having enough money to meet unexpected needs is one such goal.
This is even more important when you are paying EMIs. Prioritise saving up at least 4 months of your salary in a liquid fund or a fixed deposit. Every goal is subordinate to this as you never know when you will need this money. No matter how much you save - 5%, 10%, or 20% of your income – build up this stash first. Allocate savings for long term goals only after you have ensured that this stash, your emergency fund, has been built up.
2. The next thing once your emergency fund is built up, is to begin saving for retirement.
You may wonder why retirement when you still have to think about your child’s education or buying a home or even next year’s vacation.
Simply because, only you can save for it! Unless you expect your children to fund your retirement, this is going to be the biggest thing you are ever going to save for. Starting early is key especially if you aren’t able to save much. Retirement is also something you have the most time for.
Save a bit of your earnings here first. It doesn’t have to be a huge sum. A Rs, 10,000 monthly SIP in equity funds, which increases by 10% each year, can enable a 30 year old to retire by the age of 60 with a neat Rs 6 Cr!
3. Once you are saving for your retirement, then come other goals
Now the choice is yours. If you plan to buy a house, then the down-payment is something you can save for. Children’s college education is another thing that your savings can be directed towards at this stage.
A thing to remember here is that the further away a financial goal is the lesser you might need to invest towards it provided you choose an inflation beating asset class such as equity. If the goal amount is needed within five years, you need to allocate more and it should ideally be in stable asset classes like fixed income.
Don’t let your limitations come in the way of financial security. Every small step matters and helps.