Managing your finances: Importance of goal planning

There are other important factors to consider: one is the stage of life you are at, and another is your appetite for risk. Your temperament plays into this: people who are cautious by nature will take a similar approach while investing as well, and those with an optimistic view won't mind taking risks to earn better returns.

It makes sense to choose investment products that you are comfortable with, but bear in mind that low risks usually result in low returns, and high returns invariably come with higher risks.

Say you have now been in a job for a year or two. This is usually the time you are willing to take maximum risk, but don't have a lot left by the end of the month. You're probably waiting for that job offer with 25-30 percent higher pay, after which you will start saving regularly every month. That offer may come next week – but it may not come for another year. In the meantime you should consider these tips.

The goal could be anything – a sports bike, vacation, higher studies. Often the lack of a definite goal is the main reason for loose spending habits. Having a goal helps you stay disciplined about setting aside a fixed sum every month.

Use your credit card carefully. Check the interest rates charged by the bank which issued the card. True, you can defer repayment by just paying the minimum amount due in your monthly statement. But if you do that too often, your outstanding amount will balloon as there is interest being charged on that every month.

According to experts, having a recurring deposit is one good way of developing a habit of saving. Signing up with a mutual fund for a systematic investment plan (SIP) is another way.

While investing in risk assets like equity or equity-linked instruments, you can allocate a bigger portion of your savings when you are in your 20s and 30s. That is because even if there is a downturn in the stock market, you have time on your side.

Most experts suggest that if you don't understand stocks well enough, or don't want to take too much risk, then go for equity mutual funds. They are less risky compared to directly investing in stocks, but it's still a good idea to take expert advice before making a decision.

Don't forget that the risk-reward relationship holds true for mutual funds as well. When you're looking at this, don't go blindly by returns: check out the track record of the scheme. For instance, a fund which has given a compounded annual returns of 10 percent over 10 years may be a better bet than a two-year old scheme which has delivered 15 percent annually.

Remember, the size of your savings will depend on your income, but the more important thing is to develop the habit of saving regularly. Once you are in the habit, the size of your saving will grow as your income rises.

Plan for your taxes by putting money in instruments that offer tax breaks. Some of the products can also give decent returns over the long term while helping you save on taxes. But do not forget to take an adequate life cover, as well a floater mediclaim policy.

Your immediate priority should be to accumulate the 20 to 25 percent you would need for your down payment (this ratio may vary across banks) so that you can apply for a bank loan for the remaining amount.

Decide how much money you are willing to pay out of our own savings and the amount you want to take a loan for.

If you pay more out of your savings, and take a smaller loan, it means a lower monthly outgo towards Equated Monthly Installment (EMI). A lower EMI means you will be less impacted if you were to lose your job or suffer a pay cut.

But if some sudden expense were to come up, you may not have enough savings to fall back on.

A higher home loan also means a higher monthly outgo, but you will have some savings to fall back on in the event of an emergency. Some banks offer a home saver loan where you can deposit your surplus in a current account linked to the home loan account. The bank deducts this amount from your outstanding principal while calculating the interest component.

Having decided on the amount for the upfront payment, also set a timeframe for getting to the target. That will tell you the amount you need to save every month.

Draw up a list of your assets and liabilities, and see which expenses you can cut down on, and how much you will be able to realistically set aside every month.

Ensure that you pay every single bill on time. This is important, as any late payment – particularly on credit card dues – could affect your credit score. That in turn will have a bearing on your creditworthiness, which banks assess at the time of giving a loan.

While saving for your dream home, it is preferable to put money in instruments which allow you to withdraw it at short notice without loss. To make sure you can do this, it is important that you park much of your funds in recurring deposits, fixed deposits, liquid fund schemes and short term debt funds. Equity does give better returns than debt in the long term, but since the stock market tends to fluctuate a fair bit, there is a chance of losing money if you are investing for a short period.

There is not much to distinguish when you are investing in liquid funds. However, when you invest in short term debt funds, it is better to consult expert advice. Debt is safer compared to equity, but there are risks involved nevertheless. Some debt schemes give higher returns compared to the industry average. But that comes with a higher risk. Study the portfolio or seek the help of somebody who understands the portfolio.

During the period that you are looking to save money for the down payment towards the house, you may even want to temporarily reduce investments into equity.

Financial experts say your EMI outgo should not exceed 40 percent of your net monthly income if you are the sole earning member of your house. If it does, you will be left with little spare cash for an emergency, unless you have decent savings to fall back on.

Are you ready to take those steps to home ownership? We can help you make sense of the process.