Simple & Effective Steps & Ways for Financial Success in your Life

Here is an attempt to present a complex subject (Personal Finance Management in simplest way without compromising on the core of the subject matter. Vast subject condensed to 4 Steps and further represented in one-page picture.

Step-1: Create Emergency Fund  and Get Insurance Covers

Creating an Emergency Reserve Fund of at least your 3 months Salary / Income is your First Objective, as soon you start earning. Thereafter, it needs to maintained at that level in line with increase in your income. It needs to be recouped as soon as possible, when it gets used up. The reason why you should ever touch this money for spending is strictly  an Emergency Situation (Ex: Medical Emergency, Loss of Job etc). This emergency Fund may be parked in a instrument that is quickly liquidatable; Investing in Bank Fixed Deposits and Mutu Fund Liquid Funds is most appropriate.

Insurance is a next sub-step; A well rounded Insurance covers against untimely death (Term Insurance), Accidental Disability (Personal Accident Insurance), Illness (Health Insurance and Critical Illness Insurance). For more little more guidance read this article about Insurance Essentials.

Ensure ‘Nomination’ on all your Insurance, Savings & Investments from beginning and keep updating if required. Write a basic will, especially to ensure succession of your physical assets. 
Document the records about all your investments  and keep your family and a best friend informed.

Step-2: Investment Towards All Essential / Time Bound Goals

The important thing to do here is mapping the right investment vehicles to goals.

The investments for a given goal need to be chosen based on appropriate indicative holding period of the Investment. That means, short term investment products / schemes for short term goals and long term investment products / schemes for long term goals.
  • Short Term: Bank Deposits, Debt Mutual Funds, Hybrid Debt Mutual Funds
  • Medium Term: Hybrid Equity Funds, Dynamic / Asset Allocation Funds
  • Long Term: Equity Mutual Funds

Step-3: Discretionary  / Not Strictly Time Bound Goals and Wealth Creation / Early Retirement

Investing in Equity Mutual Funds for all Long Term Goals is the simplest and the easiest way. Some argue, investing in Equity as an asset class and not necessarily Equity Mutual Funds for Long Term Goals. However, that may be suitable only for the those who wish invest with dedication, on time and knowledge to learn and master Direct Equity Investing.

If you are one of those who is willing to dedicate to patient & continuous learning, research & analysis, you may look for Direct Investing in Equity Shares. Be a long term investor and not a trader. Learn to create a focused portfolio of select few high quality  stocks, that you expect to be multi-baggers (increase in value multi-fold) over long term. As this is difficult task and involves far higher risk than Investing in Equity Mutual Funds, don’t use it for funding your regular / time bound goals. Don’t invest large sums of money until you learn and experience through couple of market cycles over 7-8 years. During this time keep measuring the performance of your portfolio against suitable benchmark and few mutual fund schemes in that category. If you are fairly beating the performance of category average of mutual funds, over different situations (bull and bear phases), you may consider betting big sum on your investment strategy.

The basic idea here is to take concentrated exposure to few select, high quality stocks (chosen with high conviction after thoughtful study & analysis based on years of learning and experience) which usually an Equity Mutual Fund would not invest in or invest sufficiently because of the constraints it will have.

This also answers, who and when should one invest / consider investing in Equity Shares directly than investing in Equity Mutual Funds.

Step-4: Income Distribution and Succession Planning

Now that you’ve worked hard and invested wisely and accumulated wealth, it will time for reaping the fruits of your diligence and passing on excess of your wealth as legacy to your next generation.

Needless to say, if one needs to be prudent enough to protect and arrange for the retirement income like he / she was in while accumulating this wealth. Mistakes at this stage are unpardonable and irreversible. 

Wise choice needs to be done by choosing combination of instruments like Monthly Income Scheme, Senior Citizen Saving Scheme, Annuity Plans, Debt & Hybrid Mutual Funds, Bank Deposits, Bonds etc which are suitable for this phase and need.

This is also worth and dire need that you take professional help for not only arranging for income for yourself but also for passing on the legacy to your children or whoever you wish to. It is worth spending few tens of thousands to lakhs to get a will written by a legal professional, form trusts if required.


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