People have huge ambitions and dream like buying a big house, giving good education to their children in the best school/ university and their big fat weddings, going for an annual foreign vacation, retiring early, etc. As soon as we plan and invest for these goals, the better will be the returns due to compounding power. Please read our article "Compound Interest."
For most people, age 35 to 50 is the best and more productive phase of life. As per the 80/20 rule, 80% of lifetime investments are done during this phase of life. So the person has to be prudent while allocating his hard-earned money and not overdoing it with any single investment. Below are a few of life's fundamental goals of a person:
Financial security to loved ones :
Any earning member of the family has to protect his loved ones against any unfortunate events. It can be done by taking a term insurance plan with minimal cost.
Health/ Medical cover :
Lifestyle diseases like Alzheimer's, cancer, depression, diabetes, heart disease, stroke, etc., are increasing and cause deaths due to urbanization, lifestyle, consumption habits like alcoholic beverages, processed foods, tobacco, socialization, etc. As per the Insurance Information Bureau of India, medical inflation is 10% year on year for the past few years. It has increased further tremendously due to Covid-19, making it unaffordable for an average middle-class person. So it has become mandatory to have sufficient health/medical insurance cover for the entire family.
Retirement planning:
According to The Economic Survey 2019, the number of people aged 60 years and above will double from 8.6% in 2011 to 16% by 2041. As per the United Nations, the share of people aged 60 or above is projected to increase approximately 20 percent in 2050. With this, one has to understand that retirement planning is an unavoidable reality, and we have to accept the fact and start planning sooner for our retirement to live a stress-free and peaceful retired life. Delaying retirement planning is costly and shown with an illustration:
| Name | Start year | End year | Monthly investment (Rs) | Total out lay (Rs) | Obtained retuns % | Retirement corpus (Rs) |
|---|---|---|---|---|---|---|
| Bharat | 2005 | 2035 | 10,000 | 36,00,000 | 12 | 3,49,49,641.33 |
| Laxman | 2010 | 2035 | 15,000 | 45,00,000 | 12 | 2,81,82,699.39 |
| Ram | 2015 | 2035 | 20,000 | 48,00,000 | 12 | 1,97,85,107.31 |
Even though Laxman and Ram have invested more amount than Bharat, their final retirement corpus was relatively less than Bharat’s that is the advantage of starting early. The investment will grow more significantly because of more time available for the power of compounding to work well.
Children’s education/marriage:
As per Economic Survey 2020-21, headline CPI inflation changed from 6.7% in 2019-20 to 9.1% during April-December, 2020. Higher education costs are increasing at around 10% p.a. If an engineering degree costs Rs 10 lakhs in 2021 and if a child wants to go to higher education in 2039, it will cost Rs 47.96 lakhs at 9.1% annual inflation. If one wants to accumulate for the kid's college education, he has to invest around Rs 9946/month if fund returns are 8% CAGR. If investments are made in equity mutual fund SIPs, returns will be more.
Purchasing a house:
Most of us would like to buy a house that is a big-budget goal as 20% of the house's cost has to be funded with our savings in the form of a down payment, and the rest can be with the home loan through the bank.
It is advisable to start investing in equity immediately after starting a career. Our goals can be classified into short-term, medium-term, and long-term goals. Short-term goals can park money in the liquid and less volatile funds, medium-term goals with balanced funds, and aggressive equity funds for long-term goals.