A Simple Financial Plan Example
Here we look at a simple Financial Plan for the next 25 years following best Practices of
Save using the 50-30-20 rule
First, save up for a 3 month Emergency Fund
Next, invest 90% of your “financial future” funds in a Nifty 50 low cost index fund (this will vary based on age. For example, if you are over 40 you may put just 50% in a Nifty 50 low cost index fund and 40% in a CD. A financial planner can help you decide what your risk appetite is).
And invest 10% of your “financial future” funds in 10 stocks of your choosing across industry sectors as you improve your financial literacy and knowledge.
Suppose you earn INR 10 lakhs per year*, and the 30% tax slab is applicable. This leaves you with INR 7 lakh after tax.
According to the 50-30-20 rule, you should keep your needs below INR 3.5 lakhs and your wants below INR 2.1 lakhs, leaving you with INR 1.5 lakhs to invest in your financial future, or INR 12,500 per month.
For the first 2 years, if you invested INR 10,000 per month in a 5 year CD at a reputable bank, you would get a little more than 7% in interest, and in two years, you will have saved up INR 2.7 lakh for your 3-month emergency fund. This will continue to grow without further investment for the next 23 years to over 13 lakhs.
*There are 81 lakh taxpayers in the above Rs 10 lakh per annum income bracket.
3. Next, invest in the Nifty 50 no fee index fund: After 2 years, if you invest INR 9,000 monthly in a Nifty 50 index fund, you will earn on average 16% per year, and your total investment over the 23 years of INR 25 lakhs would have grown to INR 2.6 crore.
4. And, invest in 10 stocks of your choosing: After 2 years, if you invest INR 1,000 monthly in a 10 stocks, you can take on more risk as this is just a small part of your portfolio. You can learn while you earn on average 25% per year, and your total investment over the 23 years of just INR 2.8 lakhs would have grown to INR 1.5 crore.
4. In summary, If you followed good budgeting habits and continued to simply save INR 10,000 per month in 5 year CDs, at the end of 25 years, your total investment of INR 30 lakhs would have grown to just INR 82 lakhs.
But with this simple plan, you will have 4.1 crore (13 lakhs + 2.6 crore + 1.5 crore) and most importantly, you will have Peace of Mind (no financial stress).