How much should you allocate for wealth creation? I think it is a question which troubles all of us. Anshul Gaur, a regular reader has posed a very pertinent question. It is difficult to write when you watch two beautiful ladies answering funny questions on Koffee with Karan. I have just finished watching Priyanka and Deepika in a candid conversation with Karan Johar. So, I can concentrate on the blog. 🙂
Actually asset allocation is a function of your savings. First decide how much you can save. Percentages are advised by financial planners but you need to see your family responsibilities and your salary.
If I take an example, let us assume you are a 35 year old professional. Your salary is Rs 100,000 per month. You have to save Rs 9000 per month to get benefits of sec 80C. This money can go into PPF or an Equity Linked Saving Scheme(ELSS) tax saver Mutual Fund. If you put it into PPF it is going into debt but if you put it in ELSS it is equity allocation.
Rs 13000/- goes to the government as Income tax. You are left with Rs 78000/-. Assuming you have monthly expenses of Rs 60000/- . You are left with Rs 18000/- per month extra. Now, comes the million dollar question, how do I create wealth with this 18000/- ?
The answer is you have already invested Rs 9000/- towards equity. Your employer is contributing some money towards your Provident Fund, along with some contribution from you which becomes your “need money”. Assuming your basic salary is Rs 50,000/- You will contribute about Rs 6000 per month to the PF and so will your employer.
So a corpus of Rs 12000 per month goes to PF (debt) in which your contribution is Rs 6000; Rs 9000 goes to ELSS (equity). You are still left with Rs 12000 per month to plan and allocate.
What would I do with it? I would put Rs 5000 per month in another good Mutual Fund for the long term. Thus, Rs 14000 per month in Mutual Funds on a conservative CAGR of 14% over 35 years will become close to Rs12.5 Crores. That is your “Greed Account” go and poof it off.
The balance Rs 7000 per month goes towards catering for emergency expenses (after building a corpus) and gradually into your other need or greed goals.
I have not taken into account your increase in salary as well as increase in expenses. But remember, to get rich you got to take care of expenses. They should not be proportionate to increase in salary. If salary increases by 20% and expenses by 18% you would do fine.
So the allocation would be something like this
Income Tax 13000
Household Expenses 60000
ELSS 9000 Equity
PF by you 6000 Debt
PF by employer 6000 Debt
Mutual Fund eg PPFAS 5000 Equity
Saving AC/Liquid Fund 7000 (save for two years and put in a liquid fund for emergency expenses)/ (save for three years to buy your car)/ ( buy a property and pay EMIs)
THIS IS THE AMOUNT WHICH WILL CATER TO NEEDS/GREED DEPENDING ON WHAT YOUR PRIORITY IS. IF YOU HAVE A HOUSE ALREADY, SPEND IT ON VACATION, BETTER CAR, etc. And if need be take a loan from PF to meet your major need based requirements. Your equity exposure will give you a VERY big corpus for retirement needs.
Caveat: You need the discipline and patience to save for 35 years and stay the course.