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How to plan your investments this festive season

You must break your investments into goal-based buckets

September 25, 2020 / 09:56 AM IST

Satyen Kothari

Every year, we make plans to host Diwali and Navratri festivities, celebrate new year’s eve with friends, family and often even strangers. This year, however, we will be a lot more focused on ensuring that our families do well, both health and wealth wise.

If anything, 2020 has made many wish they had planned their finances better. In this article, I am going to share my thoughts on what can have a positive impact on your finances.

This is as a good time as any to rethink and realign your finances. To do this, we must take a holistic view of investments. The aim is to invest for long-term wealth creation based on your risk level, time-horizon and financial goals. After all, each person has his/her unique dreams and financial needs that have to be met.

To do this, we break our investments into goal-based buckets. What exactly does that mean? Well, it simply means you buy different investment options or assets with the aim of achieving specific goals. Let’s look at each of these.

#1 Emergency Fund Bucket: Your emergency fund should have 3-6 months’ worth of living expenses – more if you have dependents. This can be done by investing in liquid funds that earn more than your savings bank account, and also let you take money out when you need it. This amount is not to be touched unless there is a truly desperate situation.

#2 Protection Fund Bucket: This bucket is about investing in simple term life and health insurance policies for yourself and your family. If you are a frequent traveller, you should also get overseas travel insurance and if you own a house you should buy home insurance. This covers you for most unforeseen circumstances and keeps your emergency fund intact for use during extreme adversity.

#3 Short Term Fund Bucket: Once you’ve safeguarded yourself and your family, you need to think of investing in short-term assets for foreseeable expenses. These are for expenses that are just 2-3 years away such as buying a new car or taking an international trip.

#4 Medium Term Fund Bucket: This bucket helps your plan for things that are on your to-do list but are goals for 3-5 years in the future. To achieve this, we invest in multiple assets that align with this time-horizon. You can use this bucket to cover expenses such as house down payments, major renovations, and higher education.

#5 Long Term Fund Bucket: The last but also perhaps the most important bucket is the long-term fund bucket. You can invest in diversified mutual funds. This is for all your big dreams and goals. Essentially think of major expenses that are 5-10 years away but can only be accomplished if you plan ahead. Some examples of this can be saving for your kids’ higher education, your retirement or even a bucket list 365-day world trip.

It is important to identify top-quality mutual funds, stocks and alternative assets to achieve these goals. A lot of people try to invest themselves without any knowledge of the financial world. This is a huge mistake.

You don’t want to lose your hard-earned money after years of investing! Don’t be penny wise and pound foolish. If you do not have the knowledge, time and inclination to manage your money, find an expert who can guide you, or subscribe to an app or service that works with expert advisors to help you plan your finances.

Help Your Loved Ones Plan Their Finances

In the spirit of festive giving, I feel it’s also important to help our children, siblings, parents and other family members plan their finances. After all, their happiness is what brings us peace of mind as well. So, instead of giving someone physical gold this Diwali or Dhanteras, give them digital gold or give them an investment gift that allows them to buy stocks and mutual funds.

That is my advice for anyone taking the time out to plan their finances ahead of this festive season. It takes a very smart amount of time to plan your investments, but the impact of disciplined long-term investing is life-altering.

(The writer is Founder & CEO, Cube Wealth)

first published: Sep 25, 2020 09:56 am