We have talked about ways to personalize our portfolio to make the most from our investments. Most of us run our life from pay check to pay check and spend our life in this earn & pay treadmill. We get exhausted with our office work because even if we do not like it, we can not leave it due to the expenses. This Dussehra, we will learn about the 8 steps to push us in the right direction to achieve the financial independence. If you follow these steps for next 5-10 years rigorously, it will take you towards a more confident and independent financial life. If we are able to save 20 years of working life by focusing on things we love to work, isn’t that a wonderful thing.

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  1. Start Today: Procrastination is the biggest enemy of our financial well being. We keep on pushing our investment journey due to we are not able to save or we do not know which funds/ stocks to buy, we do not have a trading account, our KYC is not done and so on. Stop delaying it further and start today. What ever is feasible including Recurring deposits or fixed deposits, Make your first investment today. Call your investment adviser in this week/ month to set you up with KYC and start your investment journey. Ample number of times it is told that starting early has many compounding effect e.g. to get 1cr in 10 years you need to invest 43k per month but if you start early then 10k per month can fetch you 1cr in 20 years @12%. Do it now!
  2. Be Money Aware: Lot of people i speak with complains that they are earning less and it is in-sufficient. I always ask them to do one exercise, i am sure you will feel amazed after this. First write down the amount you think is going to be good to have in your bank account today to make you comfortable, be genuine. Then just calculate your life earnings till now, include everything from your first pay check to pocket money you got till the most recent bonus you got. If you are in your 30s or 40s, i am sure you must have earned at-least 40%+ of the amount you wrote in step 1. This shows you have earning capability but just not able to realize it. Do this exercise on a half yearly or annual basis. Write your Total life earning and track it, At the same time also track your own net worth (Total savings including your house, MFs, Deposits, Insurance, car etc).
  3. Understand your cash flow: This is a critical step because now you know “How much you have earned” over years as well as “How much do you have today”. The only piece of the puzzle missing is that where did the rest go. We do have some necessary expenses as well as some lifestyle expenses but there are some unknown holes in our wallet, which we are not aware at all. It can be compulsive shopping of clothes/ books/ gadgets or dine outs. Write down your expenses for few months, just write it down to the last ’00s and tally that you account for >95% of your money at least (Salary – Listed expenses) cash remaining in account should be closer to your calculation. Do this for 6 months and identify the holes in your pocket and plug it. remember that 1K saving for 20 years means 10Lacs. I am sure you will save many more than just 1K each month.
  4. Focus on RoA vs RoI: If you have done the first 3 basic steps, then now we should focus on the common mistakes people make. They make one SIP of 3-5k and put a whole lot of pressure in making sure that this gives them the best returns like 12-15%. if it returns only 10%, people will start asking should i change my fund or move from large cap to small cap etc etc. while their other investments like the real estate/ plot/ Traditional insurance policies/ money put in savings account/ gold jewelry bought etc are giving them 4-6% are still there and continuing. This is the main reason of misery for most people. Overall portfolio of all assets giving 8%+ return is much better than 10% portfolio giving 20% returns. Try to optimize your return on your assets but moving the correct asset categories.
  5. Respect Asset Allocation: When you look at asset allocations, Time in hand can not be the only criteria to decide the asset allocation. It has to align with your risk capacity, risk appetite and market scenario. This should help you determine your allocation to Equities vs Debt instruments. Allocation to gold/ real estate should come out of your debt component. Gold should be used only based on the its requirement like upcoming marriage etc, while real estate can be due to own use purpose or for rentals, make sure the returns are at least better than the debt fund returns.
  6. Don’t give up to Peer Pressure: When we are called social animals, it is primarily because we always look for approvals of our actions from society including spouse, parents, relatives and friends etc. Even when some people know that renting the house will be better than buying the apartment, they still buy due to pressure from society. Make your check points to follow before making this decision. below are my check points. For house buying:
    • You want to stay in the city for long term 5+ years at least
    • Net Real estate (House price – Loan taken) should not form >30-40% of your total assets
    • You should not get Home Loan EMI >35-40% of your net take home salary. You can reverse calculate your budget by If you have 1lac take home monthly, you can take EMI upto 35k per month. Current EMI rate of 881 per lacs@8.7%, you can afford loan up to 40lacs for 20 years. so house in range of 53-55 lacs only. for DINKs it stays 35% hard cut-off
    • Try buying from RERA registered near completion apartments if not already build apartments
    • Check the rental yield of similar apartment and check the PV of the apartment rental with 5% growth and 90% occupancy for 35-40 years period @8.7% should be closer to the apartment value.
  7. Avoid Credit Traps: “With great power comes great responsibilities”, In today’s world when credit cards are in bulk and people are taking multiple cards. The ease with which loans are available, it is unprecedented. {According to the Reserve Bank of India(RBI) data, total outstanding personal loan amount with banks stood at Rs 5.89 lakh crore in May, 2010. This amount rose to Rs 19.33 lakh crore in June, 2018. Consumer durables loans’ as of May, 2010 stood at Rs 8,138 crore, and rose to Rs 20,300 crore as of June, 2018. The outstanding amount on credit cards was Rs 19,579 crore as of May 2010, and grew to Rs 74,400 crore on June 2018. These are all unsecured loans, i.e., you do not have to give collateral to borrow. As of June 2018, the total number of credit cards outstanding was 3.93 crore against 1.76 crore in June 2011.} It is important for us to use the available credit to our advantage, Take credit for building assets. If we use credit card make sure your expenses are always in limit to what you can pay off, do not revolve the credit of card.
  8. Don’t follow the herd: If you have been doing the first 7 steps correctly then you are already on a right track, Now in last you just need to follow a zen model. Educate yourself and do not follow the herd. Do not make your investment buy and sell decisions based on social media but triangulate them as Ray Dalio suggests “Humility and triangulation of great people is an excellent way of raising ones probability of making a good decision.” Identify the three people from your circle whom you respect or want to become like them. Speak to them about your decision and be receptive. You will most likely take the decision which is best for you. You might lose at times on 10x bagger but at the same time you will reduce the probability to invest in decliners to 0 category as well.

These 8 Steps will help you build the sustainable wealth over time. Happy Investing & Happy Republic Day!

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