Be your own Boss : Make your Money Work for You

“We must make money work for us. You have worked hard all these time, now put that to work”. We all say this, but what exactly does this mean and more importantly how to do this. The difference between Wealthy people and others is that Money works for Wealthy people whereas others work for money. To achieve Financial Freedom truly, our money must work for us.

There's no easy answer - or a single approach to do it. In fact, we all can find at least one way to put our money to work. We at Grow Wealth Advisors zeroed in eight steps to get started.

Budgeting

The most important way to in this quest is budgeting. When we are budgeting, we are making your money do what we want it to. By assigning each penny to an investment avenue, we are controlling where your money goes and what exactly it does. This will help in a great way in achieving financial goals.

Budget is single best tool you can have in order to build wealth. Budget will give you control over finances and allows you to make financial decisions at the very beginning of each month. This process not only will help you to reach your financial goals more quickly and but also in avoiding debt trap.

If you intend to change your financial health, budgeting is first step to doing that. More often or not people will create a budget plan, but fail to do follow through after a month/ few months. Budgeting is a continuous process in which, you need to create your budget each month (or a definite time), track the expenses and make changes if needed, so you are always spending less than you earn. When the spending decisions are made at the beginning of the month, you can decide what things are the most important to you and will have a head start on your goals

Plan for Contingency

Before exploring various investment avenues, it’s imperative that we must first have dedicated fund for contingency management. In simple words, you must set aside money which is sufficient to meet any unforeseen emergency situation. The quantum of the fund will depend on life cycle and family stage you are in. This should be in form of a Savings account. For quantum/ amount of fund please seek advice from a financial advisor. This is very important and yet often overlooked step in our quest towards financial freedom. 

Beware of Debt

This is self explanatory. Today we live in world of excess. Our Wants sometime get priority over our needs. Do you know how much money you are paying as interest payment each month? How much of your monthly budget is being eaten up by student loans, car payments, and credit card bills? Imagine all this money going into investment rather than paying interest.  Such debt limits the choices that you can have and/or make. Though some debt such as student loan etc is unavoidable, things like credit cards must be used very judiciously.

Remember this line: DEBT LIMITS OTHER OPPORTUNITIES. Just think what you could do with the extra money you would have each month if you were completely out of debt. Starting your own business or fulfilling long pending wish, only sky is the limit. Sit with your financial advisor today, to plan for getting out of debt. 

If this seems to be a gigantic task, start by clearing up your smaller debts and then work on ways to tackle the bigger ones with the extra money that you have. Once this cleanup have started, you will be mighty pleased to see amount of money that can be released towards investment and wealth generation 

Take Help of a Financial Advisor

Google is a great tool for searching almost anything on internet, but as far as your hard earned money is concerned, it’s always better to consult a financial advisor. Couple of meeting with your financial advisor can work magic in your quest of financial freedom. In India, often investment decisions especially Insurance related are made with consultation with an agent who is either family friend, relatives with no or little background of financial. Such advice is sometime better than no advice and often proves costly.  Even in Mutual funds, 1000/2000 SIP is started just for sake of it and without linkage to any goals. Such casual approach towards money will be proved costly. A financial advisor should be selected based on his credentials and not randomly. Financial Advisor helps you determine your short and long-term financial goals and create a balanced plan to meet those goals. If you already have some investment portfolio, a financial advisor will evaluate and suggest changes. It’s far more crucial for new investor to seek help from a Financial Advisor as he can build a scientific Asset Allocation to fit into Life Stage and Future Goals of the investor. 

Have Adequate Insurance

Insurance is perhaps the most underrated financial asset class. Insurance should be taken because of two probabilities, a) Probability of early death b) Probability of living too long (even after retirement). But what we see is that Insurance is taken more as Tax Saving Instrument. Note when we say Tax saving, we are limiting insurance to a number defined by Income Tax Dept i.e. Section 80(c). Again this limits your Insurance Premium and has no relation to Insurance Cover. This attitude reflects in average premium size. e.g  In case of Life Insurance Corporation of India (LIC) the average premium is Rs 18000-20000. This means average Life Cover of Rs 1.8 Lakhs to 2  Lakhs. Now we don’t need an expert to tell us that in case of an unfortunate event like death, this amount is absolutely not sufficient to cover any liabilities such as loans, child education etc.

This means, insurance should be considered as very important part of any financial planning and should be given sufficient attention. We at Grow Wealth believe traditional Insurance Plans are best suited in this context. Ideal mix of Term Insurance (to cover probability of untimely death) and Endowment / Money Back Plans (probability of living long after retirement age + Tax Free Maturity) should be taken as per Individual need/ life stage. Sometimes it’s better to bear short term loss in discontinuing old plans for newer for lower premiums and / or better coverage.  

Mostly Insurance is bought at higher/ advance age. This leads to increase in cost of Insurance and lower returns. Also in hurry to Save Tax, wrong plan is chosen with wrong Plan/ Cover combo. So it’s better to start early and have sufficient cover keeping in mind future liabilities. Financial Advisors help should be sought in this case so as to maximize returns while optimizing insurance cost/ coverage ratio 

Asset Allocation / Portfolio Diversification

As per investopedia, Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon. It simply means investing as per ones Goal and avoiding adhoc investments. The objective of asset allocation is to minimize volatility and maximize returns                

In Asset allocation money is invested in various avenues such as Mutual Funds, Stocks and Bonds/ FDs. This allocation to each of this asset class depends on investors Life Stages / age and also to risk appetite & Goals. There are various asset classes such as Stocks, Mutual Funds, Commodities, Insurance and Cash/ cash equivalent etc.

For example, a conservative investor will be told to hold 60% in equity mutual funds, 40% in debt mutual funds whereas an Aggressive Investor may for 80% in Equity Funds. In it advised to take help from an Financial Advisor so that asset allocation is in sync of Goals. A Good Asset Allocation is Key to Success and Wealth maximization.      
                           

Have realistic expectations

Different asset classes as mentioned above are meant to serve varied purposes and hence returns from each class will vary. Even in high return asset class such as Mutual Funds, an investor must have realistic expectations. Over a long term (10-12 years), mutual fund may give returns of 12-15% CAGR which are good returns. In short term some fund may give 30-40% returns but it’s not wise to expect such returns each year. Mutual Funds invest in shares of companies and for any company it’s not possible to grow 30-40% year on year. Insurance on other hand is meant for protection in case of any contingency and therefore it’s not prudent to seek returns at par of that of Mutual Funds. However, it also doesn’t means to we should invest in some plan which gives less returns that saving rate. Having realistic expectations will help an investor remaining rational in times of market slump.

 Periodic Review

No matter how much fanciful the current planning is, we must review the same periodically. It’s because financial status, marital status of investor may change which will lead to investing / reallocation of money in different asset class. Sometimes taxation will change making some asset class less attractive. Ideally once a year, review of your portfolio should be done.