Jude is a young officer in the forces. The other day we met at a social do and happened to chat. Jude was interested in stocks but was completely unaware of how it works? Also, he wanted to invest in a flat. He had mentioned that someone came to him and was asking to buy an insurance policy with a premium of Rs 72000/- per year and an assured return of some 20 Lacs after the policy matures. He had not bought it but was considering it.
If he follows up with what he is planning, then the young guy seems to have a nice “financial future” ahead. I am certain when his friends would be moving in a Honda City, he would graduate to a BMW. Yes, that’s what starting early can do to your finances.
There are a lot of young professionals both girls and boys who are clueless about personal finances when they start earning. Most of us want to be rich. But there is no short cut to riches. As a matter of fact a lot of people deviate from the righteous and courageous path and adopt shortcuts. Actually, an army officer earns enough to avoid the temptations of the Devil, if he plans his finances. Remember, it is not your income or salary but your spending which decides whether you will be rich or not.
First the standard procedure. (I am fond of procedures and processes because good procedures and processes lead to efficient and systematic work at the lower level and it is always people who fail, processes seldom.)The SOP for a young professional is very simple.
• Start early and save regularly.
• Avoid credit card spending and the resultant debt trap.
• Have financial goals and work towards them.
• Be fiscally and emotionally disciplined.
The longer you wait, the more you lose. Jude has time on his side today, this benefit won’t last forever. If you save Rs 5000 a month at age 21 in a Provident Fund account and do it regularly every month till you are 50 years old , you will have Rs 71 Lacs, with PPF rate of interest being constant at 8% . But if you wake up at 30yrs of age and start saving the same amount till you are 50 you will have only Rs 28.6 Lacs.
Action Plan for Becoming a Crorepati
Jude earns close to Rs 50,000 per month. The cash in hand he gets is approx 42,000. Though, he is in field, where allowances are also additional and avenues of expenditure are less, yet to live a life with a good standard of living — an expenditure of Rs 18,000 per month is in order. Thus, Jude has an investible surplus of Rs 24,000 per month.
To become a Crorepati, what Jude needs to do is simply invest Rs 5,500 per month in his Provident Fund till he retires. If he retires at 54 yrs (though very unlikely as he should go places) he will have Rs 1 crore. If he retires at 56 yrs, he shall have Rs 1 crore 18 lakhs. If he waits till 58 yrs to withdraw, he shall have 1 crore 40 lakhs. If he retires at the stipulated age of 60 yrs , he shall have Rs 1 crore 64 Lakhs and if he takes out the money at 62 yrs of age, he will have close to Rs 2 Crore. I will take the case of retirement at 54 yrs because that is the earliest. So, Jude will have a corpus of Rs 1 crore in his provident fund.
He should put another Rs 5000 per month in an Exchange Traded Mutual Fund (ETF), my current recommendation is Q Nifty of Quantum AMC. This money, if held till he retires at 54 years of age, would become another Rs 2 crore 73 lakhs at a very conservative growth rate of 13%. Though, conventionally the sensex has grown @ 17% for the past 30 years and likely to grow at a similar rate, but in spurts as the economy grows.
He needs to pay Rs 600 per month towards the premium of a term cover for Rs 1 crore sum assured towards insurance needs. And not buy any other insurance policy ever. No matter who approaches him.
He should not touch these three investments at all, unless a dire emergency occurs where he has to liquidate all his assets. So, his retirement nest egg by these will be close to Rs 4 Crore.
Add the gratuity, insurance money ex Group Insurance Fund, leave accumulation and commutation of pension at the time of his retirement, and Jude should have close to Rs 5 crore cash. That’s as close to being a dollar millionaire as you can at current exchange rates. Cynics may say what will be the value of Rs 5 Crore after 30 years? It will still be a lot despite inflation. His total cash outgo is only Rs 41.58 Lakhs. And the entire money has been invested in risk free/close to risk free investments.
The balance approx Rs 13000/- can go towards an EMI for his flat, if he wants to go ahead with that. After a few years it will give him an additional rental income which he can spend to enjoy the creature comforts of life. And the underlying asset keeps appreciating.
Alternately, he should invest Rs 13000 per month in a liquid mutual fund. They give returns between 7.7% to 8.4% without any tax implication and can be redeemed within a day. He will have approx Rs 1.7 lac every year. With this money he can do what he wants to do, charity, social service, foreign holidays, designer clothes, spend money on his girl-friend(s). His income levels are going to increase in future and by the time he plans to marry and settle down, he would have enough. He can also meet his financial goals which are of an aspirational nature like buying a good car, going on a world tour, devoting time to his hobbies, expensive though they may be.
He can keep setting time bound financial goals and achieving them. Just four years of his savings from the above mentioned liquid funds will enable him to buy a good car/SUV in the 7-9 lakh bracket. Since, he will need this money at short notices, I am not recommending investments out of this Rs 13000. And for those of you who have been regular readers of my column, my first financial column was on Need versus Greed. So, needs should not be invested in greed instruments.
Jude only requires to open a bank account preferably in a net enabled bank, a demat account and an account with a broker. All the major private sector and public sector banks have a three-in-one account which gives you the facility to carry on your investments on an auto pilot mode, without listening to the noise of salesmen and TV channels.