Thursday, February 4, 2016

3 Things You are Not Doing Today that can impact your finances tomorrow


Murali, a 32 year old HR consultant, is worried about how his finances will shape up. His mind is often plagued with questions such as “will I have enough money to live my retirement years peacefully? how would I pay the fee for my child’s engineering degree? What would happen to my family if I am not there? Will they be able to sustain their living expenses in my absence?” Murli is not sure if his finances are on the right track and whether he is control of his future.

Murli’s questions can arise on anyone’s mind. While these concerns are very reasonable, what really matters is that how you address these concerns. You are already doing ‘X’ number of things to manage your finances, but perhaps you may not be doing some things (which you should do!) that can impact your finances tomorrow. Let’s take a look at these things.

1.   Not investing with a goal in mind
When you talk about the future, it usually referred in two timelines: immediate and distant. In the financial language, you can call these timelines as short - term (such as buying a car or renovating your home) and long – term (such as child’s marriage or your retirement). If you don’t classify your investment goals, according to the time horizon, you wouldn’t know how, where and how much to invest.

When you want to accumulate wealth (financial freedom) for the future, you need to start investing early and keep a long term perspective. More the number of years to invest, higher the corpus you would have.

2.   Not Diversifying the Investment Portfolio
In an online survey conducted by ET Wealth recently, 53% respondents admitted that have neither fixed their asset allocation nor follow it. Also, 15.7% respondents said that portfolio doesn’t need rebalancing. Now, if you are not doing asset allocation or rebalancing your portfolio every year, it's a financial slip up at your end. It could affect your financial security in the future.

Let’s say, you are a regular investor. You invest a substantial part of your savings at fixed intervals. But, if you don’t diversify your portfolio, then the chances are you are not going to benefit from the risk-return trade-off in the long run. Have you heard of the saying, “Don’t put all eggs in one basket?” The same logic applies to your investment too.  At the same time, you should also monitor your investments closely and make changes in the allocation as and when you deem necessary.

An investment instrument such as wealth plans from ICICI Prudential are a fine example of sensible asset allocation. These plans give you an opportunity to choose your own percentage of equity and debt funds to earn healthy market-lined returns. You also get the flexibility to switch from one fund to another based on your financial goals and market fluctuations. Additionally, you also get a life cover, which will take care of your insurance needs. Hence, it is advisable to have at least one wealth plan in your portfolio.

3.   Not Automating Your Investments

Surprised? Well, not setting up monthly standing instructions towards your investment could be a serious financial mistake on your part! Let’s take an example here. If you have taken a life insurance policy and decide to pay through a non – ECS mode of payment, you have to depend on manual or automated reminders to pay the premium. If you forget or delay the payment, not only your policy will lapse, but you will also have to pay a late or penalty fee. This may put a brake on your investment till the time you renew the policy again.

To avoid such a situation, it is advisable to go for automated standing instructions. This way, your investments will work like SIPs with multiple benefits. You start it and forget it, without worrying about payment reminders, policy lapse or non – payment charges. The deductions will happen automatically, thereby instilling financial discipline in you.

Your today is like a financial opportunity that you can encash tomorrow. Take advantage of these opportunities as much as you can in your present!