…With your fresher’s salary
“Fashion is very important. It is life-enhancing and, like everything that gives pleasure, it is worth doing well.”
— Vivienne Westwood
There’s just something about fashion that lures the soul, isn’t there? The caress of the soft fabric on our skin, the whiff of perfume carried on the breeze, the click-clack of a pair of heels or the seductive shade of red that’d make even apples look dull – fashion never fails to tantalize us and all our senses.
That desire to own everything beautiful, to fill our wardrobes with Gucci, Prada, Louis Vuitton and more, exists, and that aspiration to own these, not just to make a statement, but also to feel fulfilled, doesn’t just go away.
Imagine buying all that with a fresher’s salary. Not such a rosy picture, is it?
Of course there are credit cards, but there’s the issue of paying the bank back at a high interest rates. Not something I fancy doing.
Lucky for us, there are ways to make money work for us. We have our banks, mutual funds, fixed deposits and stocks. What’s more, you earn interest on these! So here’s my three step guide to own those designer products (or anything you want, really!)
Step 1: Set a goal and give it direction
What do you want? How much does it cost? When do you want to buy it? All these are questions that need to be answered. Make sure you set a clear and tangible goal with a time frame you want to achieve it in.
For example, I want to save Rs. 75,000 in two years for the Prada shoulder bag I saw at the store the other day. Just look at that beauty. One of the finest from Italy, the craftsmanship, precision and quality, I still remember how holding the bag felt. So, I’ve got my goal – a specific amount I’d like to have for the Prada bag and I know I intend to buy it in two years. What next?
Step 2: Understand your current financial obligations and risk profile
It’s important to know how much you actually have in hand, how much you need for your regular expenses, how much you’ve already put away in the bank or need for insurance or getting debt free. A clear picture of all these will tell you how much you can put away for your goal.
Your risk profile is important because there are three facets that need to be addressed here – how much risk you can afford to take or your risk capacity, how much risk is required to produce returns that could help you achieve your goal or risk requirement, and your ability to cope with market volatility or risk tolerance.
If you aren’t sure how to do this, talk to a financial advisor. Your advisor can help you assess your current financial obligations and risk profile in detail and give you solutions that are unique to your needs.
Step 3: Choose how to make your money work smarter, and make it.
More often than not, the options you have in hand involve your bank, stocks, debt instruments and mutual funds.
The solution here is to invest in products that deliver the best return. That depends on your goal, how many years you have to reach it, its priority, tax-efficiency, and how much risk you can take.
Bank accounts may be the safest place to put your money, but with an interest rate of just 4-6% it won’t help your money grow enough to meet that need on time. To earn Rs. 75,000 for the bag in 24 months, you’d have to save Rs.3,000 every month.
Equities are good for the long term while debt is good for the short term. The best option to invest in both equities and debt are mutual funds. They are managed by professionals, offer diversification, are tax efficient, beat inflation and have low costs.
Debt mutual funds, ideal for the short term, can give you returns between 7-9%, much more than your bank. So at 7%, all you need to invest every month for 2 years would be Rs. 2,910. If your fund performs better than 7%, you’re so much closer to your goal faster. Also, if you put the same Rs. 3,000 in a debt fund at 7%, you’d have Rs.77,493 at the end of 2 years.
If you’ve got something more expensive in mind, and a longer time frame, consider equity mutual funds.
Equity mutual funds are a good option for medium or long term investments, for three or more years. If you’ve got other long goals in mind, these are a good option to consider. For example, if you invest Rs. 5,000 every month for 3 years and your fund gives you a return of 12%, your investment of Rs. 1,80,000 will become Rs. 2,17,538. That’s a whooping Rs. 37,538 more! In your bank, that money would become Rs. 1,91,544 at 4%, a gain of just Rs. 11,544.
Fun fact – Rs. 5,000 invested at 12% every month for 5 years, a total of Rs. 3,00,000, would grow to Rs. 4,12,432. Rs.5,000 invested at 12% every month for 10 years, a total of Rs. 6,00,000, would grow to Rs. 11,61,695, a gain of over Rs. 5,00,000. That’s what compounding does to your investment over time.
If you need to calculate how much you need, use a SIP investment calculator. For my goal of buying that Prada shoulder bag, I’m investing in a debt fund because that’s ideal for the short term. But I dream of travelling too, and to make that a reality, I’m investing in equity mutual funds.
You’ve probably got your heart set on something now, but even if you don’t, it’s a good call to start investing right away. The compound interest you earn over time will be instrumental in getting to your future goals.
Then splurge to your heart’s content without raking up any debt.
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