1. Goal setting
a) Write down realistic goals and their expected time frame.
b) Calculate money required for each at today’s cost.
c) Compute future cost by factoring in inflation.
2. Creating surplus
a) Make a deliberate attempt to increase savings by reducing expenses.
b) Find out how much you need to invest to achieve your goals with reasonable return expectations.
c) Change your investment habit from the normal ‘earning – spending = investment’ to the more scientific ‘earning – investment = spending’.
3. Regular investments
a) Invest regularly through compulsory savings or active investment plans.
b) For those who can’t control their spending, compulsory savings like Provident Fund, tax-saving products, or repayment of housing loans are the best options.
c) For active investment plans, the best way is to make investments before the money reaches you, which can be done in the form of recurring deposits (RDs), systematic investment plans (SIPs) with mutual funds, etc.
4. Investment account
a) Two accounts—one for investments and the other for regular income like salary—help get a clear idea about your passive and active income streams.
b) Shift a fixed amount every month to the investment account from the regular one, and let all your investments flow from the latter.
c) Similarly, let all redemptions, interests and dividends flow back to the investment account for reinvestment.
5. Asset allocation
a) Stick to a standard asset allocation based on the formula 100 – age for parking equity for long-term goals, regardless of market conditions.
b) Since equity component will go up in a bull market, this should result in moving a part of equity assets to debt, and vice versa during the bear market.
c) This also prevents being swayed by crowd psychology.