Prioritise your financial goals

Sharadd C Mohan

In the present day and age, the financially productive stage covers the ages 24-25 through 55-58. If you’re someone who’s on the wrong side of 40, and have not yet started putting something aside for it, then you may have to push back your retirement plans. After all, two-thirds of your financially productive period is already behind you by now.

And what makes planning particularly tough at this age is the fact that this is that time in life when, on the one hand, you are saving/investing for your future, while on the other, you are consuming/withdrawing some of your earlier investments. So what kind of planning would you need to do at this stage in life?

The first thing you need to do is to take stock of your current financial situation—your income and expenses, and your assets and liabilities. Unless your assets (read investments) are earning much more than what your liabilities are costing you (interest cost, EMI, etc.), repay your loans at the earliest.

Next, enlist and prioritise your goals. This is critical, as you’ll probably realise that you may not be able to achieve everything you’d want to, and that you’ll have to push some goals way down—and others out of—the list. Goals at the head of the list should include settling your children, buying a house and living comfortably post-retirement. For these goals, you’ll need different amounts of money at different points in time; you must, therefore, prioritise your goals chronologically.

The best way to build a corpus for your future needs is to decide upon, and maintain, an asset allocation chart. The actual assets and their proportions will depend on your specific circumstances, but you may look at putting 40-55% of your money in growth assets (stocks, equities, etc), between 35% and 50% in fixed income instruments (bonds, fixed deposits, small savings schemes, debt mutual funds, etc) and around 5-10% in cash (savings and sweep accounts, money market mutual funds, etc).

Of course, you may add more asset classes if you want, but don’t overdiversify, as that may end up increasing your risk, instead of reducing it.

One common mistake that people in this age-group tend to make is to become ultra-conservative and put all their money in “safe” instruments like fixed deposits and bonds, happy in the thought that their money is not at risk.

What they don’t realise is that they are losing an opportunity to grow their money, since over a period of 10-15 years equities will, in all likelihood, earn positive real returns. That is, they will earn over and above the average inflation rate over the same period.

Sharadd C Mohan, Certified Financial Planner. He can be reached at sharadd@calibreindia.com.