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Adhil Shetty says the next decade belongs to capital security

Adhil Shetty says the next decade belongs to capital security

The next decade will belong to those who expect the best but plan for the worst

The slow one now, Will later be fast, As the present now, Will later be past
The order is Rapidly fadin', And the first one now, Will later be last
For the times they are a-changin'

These immortal lyrics from Bob Dylan may as well be a prophecy for the coming decade in terms of personal finance. The times are changing and we need to be ready. What all should you do with your personal finance in the 2012-22 period is the theme of my column.

Let us take a quick look at the trends in personal finance in India 
  • Domestic savings rate estimated as a ratio of GDP is estimated at 34 per cent and investment rate at 37 per cent for 2011/12.
  • GDP growth is expected to be seven to 10 per cent over 2012-2020.
  • GDP per capita is expected to grow from $1,300 to $2,200, according to the International Monetary Fund
  • Financial service penetration, while growing dramatically, remains low. For example, mortgage as a percentage of GDP is approximately 10 per cent in India compared with over 20 per cent in other emerging economies.

The numbers highlight that Indians are growing through a transformative phase in our economic development life cycle. We are in for better times compared to other nations. However, it is not all hunky dory as the world economy seems to be staring at a recession deeper than what we saw in 2008, and that can impact India's growth trajectory.

So what does the common man do in such a state? Plan for the worst and expect the best!

New mantra: save more
Old mantra: Income - Expenses=Saving,
The new mantra Income - Savings (20 to 30 per cent of income) = Expenses

Although we have heard this over centuries, we rarely follow it. With higher gdp and per capita income, ours will become more of a spending/consumption society. The next decade will belong to those who can control their urge to spend and who, instead, save. It would be good for an average family to save
20 per cent of its income at the very least, but every family should aspire to save 30 to 40 per cent - difficult, but achievable.

Debt management
RBI data on liabilities of Indian households', show an almost 30 to 40 per cent Y-O-Y growth. This is due to easy availability of loans from banks. And with more players entering the banking sector, the situation will be more interesting in the coming years. However, interest rates don't seem to be cooling down yet.  Ideally, the debt serviced per month should be less than 20 per cent of your income but if you have already saved diligently, you can afford to align it to the more aggressive bank guideline of 40 to 45 per cent of your income. The idea is to play safe, when it comes to debt.

Investments: three things to do - diversify, diversify and diversify
In terms of investments, predicting which instrument - stock, mutual fund, or land - is best over a 10-year period is extremely difficult. The solution is having a diversified portfolio, which can accommodate all the adverse and positive scenarios associated with each investment vehicle. Avoid getting tempted by the short-term growth of an investment vehicle; focus on a wholesome portfolio. Capital security at the expense of dramatic growth may well be the theme for the coming decade.

Insure yourself against uncertain times
Insurance is a tool that should be an integral part of your financial plan; all the more when faced with uncertainty. A large part of your life insurance should be flowing into a term insurance plan as compared to investment-cum-insurance plans. Anything around 10 to 15 times annual income can be the thumb rule for life cover.

Anything around 10 to 15 times annual income can be the thumb rule for life cover. However, you need to look at your current lifestyle to evaluate the kind of insurance cover needed. An accurate way to calculate insurance cover is to evaluate HLV, or Human Life Value. This is the probable income of the insured person, or the total income the person is likely to earn during the remaining part of his working life. For example, a person aged 24 will work till 60. If he is expected to earn Rs 90 lakh throughout his life, then his HLV is Rs 90 lakh. This is not the actual income but rather the target that he should try to achieve in order to live a secure life and provide adequate cover for his dependants.

Also, taking insurance while you are young will ensure that the premium cost is low. Besides, medical costs will rise drastically in the coming years. This combined with the new lifestyle diseases afflicting society imply the importance of health insurance. Channel a portion of your income towards a comprehensive health cover for your family, including your parents. Preventive health-care is the best insurance against disease, eat healthy and stay active.

Get educated or get a planner
With the entire financial services world eyeing India over the next decade, expect more
financial products and newer jargon. It is time to realise that you need access to good neutral financial information. Start researching information on the web, which is freely available, and perhaps look out for a professional, unbiased planner who can guide you. Nothing can beat the power of information and how that information can be used to grow/safeguard one's interests.

Stay healthy, grow wealthy, and live happy. It is a decade for India and Indians. Enjoy the surge but, at the same time, be ready for the dives, too.

The author is CEO, BankBazaar.com

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