A young reader writes, “I am a recent graduate, who used to dump his money all on a Nifty fund I picked at random. But with your videos and articles, I now have an idea about choosing funds. But I still am confused about asset allocation. Other than an Index fund, I have no idea which assets to buy. Can you help me get a clear idea?”
Personal money management is the simplest and cleanest when started from scratch. At age 21/22, you are best suited for this, and you have the advantage of time (starting early) to build your wealth.
Before we get into details, here are some broad thumb rules to follow:
- Never buy any product because it helps you save tax. In fact, we strongly recommend opting for the new tax regime (as and when you are eligible) and getting rid of this tax-saving business.
- Never chase after returns, fancy products, or any activity that kills a lot of your time (e.g. trading). You have already taken a massive step in the right direction by opting for index funds.
- Never buy anything that others are buying. Understand your requirements and buy something suitable. This obviously applies to all aspects of life and not just personal finance.
A getting started checklist:
- Get life insurance (15-20 times annual income)
- Get health insurance for parents (if not present). Get a separate health cover for yourself.
- Build an emergency buffer: Say your income is Rs. 25,000. Over the next few months, you should gradually build an initial emergency buffer of about Rs. 1.5L, and then keep adding 5-10% of your income each month to it. If it depletes due to an emergency, replenish by temporarily stopping investments.
- List your short-term goals: needs or wants you can imagine within the next seven years or so. You can allocate some money for them ( any online goal calculator would do with about a 6-7% pre-tax return assumption). Use a bank RD, liquid fund, arbitrage fund, or money market fund for these. For recommendations, see: Handpicked List of Mutual Funds Jul-Sep 2022 (PlumbLine)
- The rest you have left with you can be allocated towards financial independence. Say Rs. 5000 is left, and say Rs. 3000 is the total EPF/NPS contribution (employee + employer; ignore EPS contribution). Invest Rs. 5000 in a Nifty or Sensex index fund. If you have NPS, opt for 50-70% of gilts (G) and the rest in corporate bonds (C). Aim for an asset allocation of 50-60% equity (a bit higher is ok too) and the rest in fixed income.
This is all the portfolio design that is necessary! What is more important is to make use of the time you have. Most people think like this in their mid-thirties. So you have a huge head start. If you take a long-term view, you could achieve financial independence in about two decades.
How to think like a rich person
The steps above would give you the right start. Let us now discuss how to sustain this momentum and think long-term. As Jeff Bezos said, we need to have a 25-year, 30-year view of life. We need to tell ourselves, “today, my net worth may be zero, but in two decades, I will be a crorepati; In three decades, I will be a multi-crorepati;”
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Don’t share this with anyone. They would first tell you, “it is not possible”. Then, as Jim Carrey said, “you work hard!” and focus on upgrading your skills. See: Want To Get Rich? Write Yourself A One Crore Cheque!
What does having a long-term view mean?
- Investing without expectation of immediate returns;
- Not focusing too much on discounts, cash-backs, reward points etc. They can give you some pleasure, but your aim is happiness and contentment (NB: I did not say to avoid!)
- Do nothing for at least one hour a day: literally nothing. This is when ideas are born.
- Optimize time. Time management makes up for (self-perceived) lack of genius or intellect! Time is real wealth.
- Look at your investment once a year (just to see if it is still there!)
- Do not add any more investments. There will be new products each month. Fear of missing out can destroy a portfolio. You should fear missing out on productivity, not products. You are already a momentum investor when you put money in Sensex or Nifty; You do not need a separate index fund for this 😉
- Create a cash flow chart in Excel. In 2020, I can invest Rs. 5000 a month. In 2021 I will invest 10% more: Rs. 5500. by 2028, I should be investing more than Rs. 111,000. I should double my investment every seven years or less.
- Religiously track the investments made each month (the investment made, not their value!). See: Why increasing investments each year is crucial for financial freedom.
We wish you all the best!