Your 30s are crucial. It's the fourth decade of your life, and your career has just begun to take-off. It's the time when your responsibilities increase. It's also the time when you create long-term goals for your child's education, retirement, and so on. It's the time, in essence, that calls for some serious financial planning.
However, this is also the stage when due to higher responsibility at work one is not able to spend much time on one's investments. Due to this, often, funds lie idle in a savings bank account. Being easily accessible, savings account balances do not last long and this leads to higher expenses.
You make a number of investments, without understanding costs or risks and which may not even be in line with your priorities.
If you are married and have children, you need to secure your family's future. This is also the time when one scouts for one's own house, with which comes the burden of Equated Monthly Instalments (EMI). Towards the latter part of this period, retirement needs become a priority. While embarking on a financial plan, tax-planning too begins to take centre-stage. The advantage is that one can assume reasonable risk during this period since long-term goals are still some time away.
You need to allocate your capital according to your requirements and goals. For example, both tax planning and purchase of house is possible through a home loan. One can avail of a deduction of up to Rs 1.5 lakh per annum on the interest paid on a home loan. In fact, each spouse can secure the benefit of Rs 1.5 lakh each if the overall interest is Rs 3 lakh or more. In addition, one can (under Section 80 C) avail of a deduction of Rs 1 lakh per annum on the repayment of the principal with other eligible investment options.
Since this is the time for reasonable risk, it is prudent to consider investing in Equity Linked Savings Scheme to save tax if there is yet some scope under Section 80 C. This could also be a good time to initiate investment in the Public Provident Fund, a good low-risk option providing tax-free returns.
Planning for a child's education is also an important part of this phase of life. Considering the high cost of education and spiralling inflation, it is important to plan early for a child's education. While one can take care of schooling expenses through regular income, higher education requires larger lump sums. Therefore, it is important to plan early. One could utilise suitable avenues such as PPF, balanced/large-cap mutual funds or insurance plans.
One should start allocating small sums of money towards retirement. An early start would be immensely beneficial in the long run. For example, if one wishes to build up capital of Rs 50 lakh in 15 years, Rs 8,316 per month need be invested. If you skip this period and wish to build this amount in 10 years, you need to invest Rs 18,853 monthly at the same rate of return.
A disciplined investment approach could help avoid some pitfalls due to paucity of time at this stage. Systematic investing in mutual funds is one of the best investment options during this period. SIPs mean purchasing more units when the market falls and fewer units when it rises. Over time, this mode of investment becomes, as well, an effective tool for risk management. Tax efficiency, ability to take risks and the need for long-term planning are all arguments in favour of mutual funds. One can invest in both equity and debt instruments at a low cost, without the need for daily monitoring. Ideally, one should look to invest 50-70 per cent of the mutual-fund allocation in equity funds, 20-40 per cent in debt funds, and 10 per cent in gold (either Exchange Traded Funds or mutual funds) based on your risk profile.
Lastly, this is also a period when you take the responsibilities for the financial well-being of others (spouse, children, aging parents, and so on). Therefore, do not miss out on taking out appropriate life cover. You can choose from a range of options or go for a simple term cover. Ensure that you have covered all your liabilities and have sufficient cover to secure your family, especially if your spouse is not working.
SAVE SMARTLY TO BUILD LONG-TERM CORPUS
* Set aside 25 per cent of your income towards investments
* Use the SIP route to secure maximum returns (this also helps manage risk)
* Plan your tax carefully - and make the most of tax-saving investments
* Evaluate your life-cover requirements, and insure yourself sufficiently
* Long-term investments should be utilised to benefit from the power of compounding.