In today’s volatile, uncertain, complex and ambiguous world, getting your financial planning right is of utmost importance.
As the new financial year starts from 1st April 2024 to 31st March 2025, now is the right time to take a step back, assess your financial situation, set realistic goals, plan your investments, start investing and saving, and consistently monitor those.
If you haven’t done any investment yet or you have been investing regularly or not so regularly, this article will cover the basics and provide you a quick guide or a framework to jump-start your financial planning for FY2024-25.
We are assuming you are a salaried person.
We at ChilliWealth have a 5-step framework.
Step 1: Understand Micro market Inflation and target Inflation Adjusted Returns
Step 2: Protect yourself and your family
Step 3: Reduce Debt
Step 4: Balance among Five core Assets: Fixed Income, Equities/ Mutual Funds, Gold, Cash & Cash Equivalents, Real Estate
Step 5: Governing Equation: Income - Savings = Expenses
Step 1: Understand Micro market Inflation and target Inflation Adjusted Returns
As of today (March 9th 2024), National Inflation figures in India is as below as per Ministry of Statistics & Programme Implementation (LINK)
The Food Price Index is at 8.3% (national combined avg.)
Note:
Consumer Price Index (CPI)
Consumer Food Price Index (CFPI)
Base 2012=100
All India Inflation rates (on point to point basis i.e. current month over same month of last year, i.e. January 2024 over January 2023)
But how does this impact you?
Let us assume you stay in Delhi NCR region. This location is an urban location. If the CFPI is at an avg. of 9.02%, then it is safe to assume that you as an individual who purchases groceries from retail chains like Spar, Spencer, Reliance Retail, just add a conservative 2% more to this CFPI. That is the cost of convenience that gets added to the avg. inflation rate. So, if in Jan 2023 you bought something for Rs 100, in Jan 2024 it costed you Rs 111.02.
This means your purchasing power reduced for the same product in a year.
To learn more about inflation and impact on purchasing power, read our in-depth article here and here.
So if you are planning an investment, always remember to calculate inflation adjusted return.
Thumb Rule: Real Interest Rate = Nominal Interest Rate – Inflation Rate
e.g.: if a FD offers 7% Nominal Interest Rate per annum and Avg. Inflation is 9%,
the Real Interest Rate = 7% - 9% = -2% per annum;
The Rs 100 invested today at 7% in an FD at 9% inflation will reduce to a purchase power value of Rs 98 in one year even though in absolute terms the FD will show the value of invested Rs 100 as Rs 107 after one year which is misleading!
Step 2: Protect yourself and your family
Medical inflation in India is surging at an alarming rate.
In a recent article in LiveMint (LINK and LINK), India has one of the highest medical inflation rates in Asia, reaching 14%. It has been found that the burden of healthcare expenses is disproportionately affecting over 90 million individuals, with costs exceeding 10 percent of their total expenditure.
It is paramount to insure yourself and your family!
Get a medical insurance and a pure term insurance today!
Never take an annuity life insurance plan as the returns are pathetic and doesn’t even beat inflation!
Thumb Rule: Get Medical Insurance a family floater one of at least Rs 10L with a top up of another Rs 20L.
The early you buy the better it is. Try to buy multiyear plan to reduce annual increase of premiums
Thumb Rule: Get one Term Insurance of at least 20 times of your current annual CTC under MWP act if you are married and another Term Insurance of your overall debt such as Home Loan matching the outstanding amount of the debt such as home loan
Step 3: Reduce Debt
Debt is a way to either fulfill our aspirations such as home, car, vacation, premium phone or meet urgent medical expenditure.
However, we often don’t realize the cost we pay for these.
A debt of Rs 100,000 at 10% Rate of Interest for 20 years results in an EMI of Rs 1,000 and cumulative interest paid is 140% more than principal amount Rs 140,000
It is always good to prepay debt especially in case of home loans or any other major high value loan/ debt.
Prepaying the a fixed amount as extra payment every month can help save a lot of interest and also reduces the tenure.
For example, in a loan of INR 1Cr (INR 10 Mn) at 10% rate of interest for 20 years one pays an EMI of Rs 96,502 and a Total Interest of INR 1.29Cr (INR 12.96Mn).
However, if one pays an extra amount of INR 10,000 per month, the loan will be closed in 15.42 years (saving interest payment on 55 months) saving INR 11.26L (INR 1.126Mn) in interest payments.
Thumb Rule: Get rid of all high value loans/ debt as soon as possible!
Step 4: Balance among Five core Assets: Fixed Income, Equities/ Mutual Funds, Gold, Cash & Cash Equivalents, Real Estate
We as investors are always confused among the different investment assets in which we can invest.
We have covered majority of investment assets in details in our article that can be accessed here .
| Asset Type | Entry Capital Requirement | Risk | Volatility | Capital Appreciation Potential | Hold Period | Taxation Potential |
|---|---|---|---|---|---|---|
| Equities/ Stock | Low | Medium to High | High | High | Medium to High | Low (LTCG) to Medium (STCG) |
| Fixed Income/ Debt Investments | Low | Low | Low | Medium | High | Low (PPF) to High (FDs) |
| Real Estate | High | High | High | Low to Medium | High | High |
| Mutual Funds | Low | Medium to High | Medium | Medium to High | Medium to High | Low (LTCG) to Medium (STCG) |
| Gold | Medium | Low | Low | Medium | High | Low (SGBs/ Physical; Gold) to Medium (Digital Gold) |
| Alternative Investments | High | High | High | High | Medium | Medium (LTCG) |
Our recommendation is the following:
| Asset Type | Our Priority Rank | Comments |
| Mutual Funds | 1 | Start with monthly SIP in mainly three types of funds: Large Cap Index (Nifty 50), Mid Cap (pick any top ones that have provided consistent returns in last 5 years), Debt Funds like GILT funds (these invest directly in Govt. Bonds). |
| Fixed Income/ Debt Investments | 2 | Safe and secure. Next set of investments should be in Fixed Income instruments. One can simply start with a monthly RD and start saving money. The rate of return in very low when inflation adjusted but this investment asset is quite useful in creating an emergency corpus or meet immediate urgent expenses if needed. |
| Gold | 3 | Buy Gold ETFs in SIPs. Never buy physical gold if you do not have emotional attachment to the yellow metal |
| Equities/ Stock | 4 | Invest very carefully. We usually do not recommend direct investments in equities unless you are good at understanding company performance, market dynamics and can take an educated guess on near term price movement. |
| Alternative Investments | 5 | Alternative investments encompass a range of options such as P2P lending, angel investing, and derivatives trading. These are high risk investment instruments. Be very careful. |
| Real Estate | 6 | Requires high capital, long term debt and returns are typically in the range of 3-6% in residential properties and between 8-10% in case of high profile commercial properties. If you have idle cash lying around then one can explore this investment asset. |
Thumb Rule: Start small. One step at a time. One SIP at a time. Let the power of compounding help you and your family!
Step 5: Governing Equation: Income – Savings = Expenses
Take a pen and paper or open an MS Excel/ any spreadsheet application create the following structure. If you want to download the version we have created, please use this link: LINK
Once you download or create this spreadsheet, start inputting the required numbers that you anticipate between 1st April 2024 to 31st March 2025
In the Income Section enter all income details.
In the Deductions enter the details as per your payslip.
In the Savings Section enter all target savings. Edit the line item names as per your choice. We have populated the line item names based on general observation.
In the Expense Section enter all potential expenses. These are bifurcated in two broad categories: Fixed and Variable Expenses.
Edit the line item names as per your choice. We have populated the line item names based on general observation.
Once you have entered all the details, check the numbers and adjust those to manage your monthly expenditure.
Thumb Rule: Try to save 25-35% of your income over and above the EPF and NPS Savings.
That’s it. You have figured out the budget for each line item of target savings and potential expenses for the financial year!
Congratulations!
Keep this spreadsheet handy, save it on your Google Drive, every month after you receive your income input the correct numbers and track the progress.
Disclaimer: Article written based on writer’s experience, knowledge and content.
Image source: Microsoft Designer
