When we look back at all the things we studied in school such as calculus and chemical reactions, we often wonder if we use any of them now in our day-to-day lives. And what about the skills that we would actually use in life, but were not taught in school or even college? Financial literacy, being one of them.
Financial literacy and/or planning is something many people still struggle with even after graduating with degrees and starting their work lives. Though it is a simple concept of saving for the future, many are unprepared for when and how to go about it.
“Financial planning is a basic part of life that needs to be taught from a young age because of how we need it in our daily lives,” says V. Nagappan, Chief Mentor at MSE Institute of Capital Market. “Apart from schools and colleges, many companies that hire new staff during their orientation should also be informed of all the various financial options that are available to them and help their employees to understand them better,” he adds.
Goal setting
Before we start, it is best to have some financial goals. “Before one starts investing, It is important to understand each of our wants and the different expenses that those wants fall into according to our goals,” says, S. Srinivasan, Founder, Money Kare.
Whether the goal is to buy a new smartphone, go on a vacation, pursue higher education or buy a home, know what you would like to spend your money on and work towards that. Categorise them into a timeline, that is, short-term goals (six months to a year), mid-term goals (three-to-five years) and long term goals (10 years and more). This makes it easier to save when you know what you are saving towards.
“You should always have at least a minimum of six months worth of expense money in your account; this fund should be available at any point of time for you to fall back on. The problem often arises when you underestimate your expenses and spend this money and there is nothing left in your account,” he explains.
To make saving easier, invest a small sum as soon as your get your salary. That way, you can budget whatever is left towards your lifestyle and other expenses.
Simple options
What kind of investment or savings should one make? There are various ways in which you can get started.
A Recurring Deposit (RD) account is ideal for short-term goals. It is an investment tool which allows you to make regular deposits of an amount of your choice, and earn decent returns on that investment, through your bank. It can also be accessed at any point of time after just six months. However, the interest rate is fixed and does not change during the tenure of the investment.
For mid-term to long-term goals, mutual funds and Systematic Investment Plan (SIP) could be some of the options. A mutual fund is a professionally managed investment option that pools money from many investors to invest the money into a variety of investments such as stocks, bonds, and shares. A SIP is a method of putting money in mutual funds in small periodic instalments, that way one can invest small amounts instead of a lump sum. With SIPs as well, you can fix a date in which a defined amount of money will be debited from your account to be invested in a specified mutual fund.
One of the main differences between a RD and SIP is that with a RD you will know exactly how much money you will make at the end of tenure, whereas the returns from a SIP is variable, as it depends on how the stock market performs. Risks with SIPs are more but, recent data shows that SIPs give good returns if held for a long period, for over five years at least.
Whichever form of saving you choose, you should be fully aware of the risks involved and carry out a detailed research before making your investments. This is where financial literacy can help.
Self-learning
There are ways to educate yourself about managing finances on your own too. There are websites that offer free learning materials regarding financial planning such as ncfe.org — the National Centre for Financial Education. This site with its contents promotes financial education and understanding of the very basics of finance, savings, investments and so on. The RBI too offers educational material, and for children as well.
Institutes such as the National Institute of Securities Market offer courses with which you could also go on to become a certified financial planner, financial advisor, or a research analyst.
The best time to start saving is while you are still young, when you have the ability to take some financial risks. Stay informed, be aware of your options and make educated decisions so that you can make good choices that reward you abundantly in the future.
*Inputs from Aarati Krishnan, financial consultant.
