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Head Start

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A Late Start in the Race

You are in your 40s and have suddenly realised that financially you aren’t ready for your children’s education or marriage. Worse still, you haven’t even secured a house.

Don’t despair, for you are not alone. Many of us start chasing our goals quite late in life. The good news is that you may still own a house, retire comfortably and see your children settle down. Nevertheless, starting late can never give you the edge you would have got had you started saving early in life. Besides, a later starter may have to make certain compromises.

THE OPTIONS

There are basically three ways in which you can build a respectable corpus if you took to saving a bit late in life. First, try earning more while keeping costs in control. Second, extend your work life, which means you need to work beyond your normal age of retirement. Last, compromise on your goals a bit. Maybe you may have to settle for a three-bedroom house instead of a four-bedroom one.

COVERING RISKS

Before you venture out to restore your finances, ensure that you and your family members are well protected. Get a health cover for yourself and your family and a pure term insurance cover for yourself to offset any liability should your family have to lay hands on your accumulated wealth to pay off a liability in the event of your demise.

ESTIMATING

Now, identify, prioritise and quantify your goals and consider the expense at current costs. Assume an inflation of 5 per cent per annum and arrive at a figure, adjusted to the years left for the goal. Calculate how much you need to save each year for each of your goals. Unless you arrive at this figure, you will not be able to save effectively.

CATCHING UP

Your savings requirements would have been much less if you had started saving early in life. But under the given circumstances, save at least 15 per cent of your post tax monthly income or the amount you have estimated. Increase it by 5 per cent each year till the desired level. In short, a late starter has to save more than the early birds. To this effect, try cutting down on your spending without affecting your lifestyle much. Do not give into extravagance and impulsive indulgence.

Your primary motto should be to save more to catch up for lost time. Make sure to invest any employment bonuses, accruals, windfalls from inheritance rather than use them on your entertainment or for buying new gadgets and gizmos.

START-LATE PORTFOLIO

Starting late implies you need to accumulate wealth within a shorter period. Do not attempt in generating higherthan-normal returns from easy-money schemes. Just put in higher amounts in savings to see you through. Invest generously in equity products, but remember that you cannot take too much equity risk because you do not have a long time to recover losses if the stockmarket tanks. Equities take time to deliver. Invest your savings in equity and debt in the ratio of 65:35. The monthly contributions made to your provident fund account can be counted as a debt investment. For your equity investment, consider index mutual funds (MFs) or exchange-traded funds (ETFs) as both are passive funds. They cut out the fund manager risk while still giving you the equity edge. Stick to 3-5 such funds. You may also consider locking your funds in long-term bank fixed deposits (FDs), bonds or National Savings Certificate (NSCs). Buy gold through gold ETFs, but they should form only about 10 per cent of your portfolio. Review gold performance periodically and trim it back to 10 per cent in times of gains. Avoid direct stocks if you have not invested in them earlier. Else, buy into large-cap stocks after scrutinsing their financials.

CONCLUSION

Start moving your funds from equities to less volatile debt assets about three years prior to your goal. This will help in preserving your capital. Still, keep a portion exposed to equities, ideally through balanced funds, to tackle inflationary impact to your savings. A late start may not jeopardise your goals, but will certainly require a more serious commitment to saving.

Next To Come: Succession Planning