Financial Fitness

You’re doing OK if you are doing the following things:

1. You’re doing ok, if you are getting a full 12% of your basic deducted towards your Employees’ Provident Fund. This ensures that the employer is pulling in 12% as well into your retirement fund. One calculation says that somebody who begins work in early 20’s at Rs 20,000 a month salary and sees a 10% increment each year will end his career at 60 years of age with a provident fund (PF) corpus of Rs. 2.6 crore. Most of us have fragmented earning lives due to job changes or breaks in career (specially true for women) and don’t allow PF to build up. To get the best of this taxfree government largesse, just don’t break your PF thread. Don’t withdraw, allow it to grow. In addition, if you are contributing the full Rs 70,000 to your PPF account each year and not dipping into it, you’re are doing fine.
2. You’re doing OK if the house in which you live is fully owned or there is a property that is in your name. In addition, if you decide to take a loan and buy another property as another real estate investment, the math becomes a bit more complicated. It will work if the rent you get covers about half the equated monthly installment (EMI). It will work if the EMI can be covered easily by one income in a two-income household. Real estate gets complicated and very specific to the person because the ability to leverage future income differs across people, incomes and appetite for risk. The safest way is to own the roof over your head fully. Then, as a retirement planning tool, it is fine to buy a second property that you let out. Of course, the ability to deal with the seamier side of India as soon as you get into any property deal is something you need to be able to stomach. Makes me sick—but that’s another story.
3. You’re doing OK if you have a pure life insurance cover that gives between Rs 25 lakh and Rs 2 crore to your family in your absence. An income of Rs 12 lakh a year will usually need about Rs 50-70 lakh as cover. Keep adding cover for the loans you take. You’re doing OK if you top up your office mediclaim with individual policies for self and spouse. Or if there is no office cover, individual policies for the family topped with a floater. You’re doing OK if a household insurance policy covers the house and its contents.
4. You’re doing OK if you have some cash in the bank towards an emergency—think of three months without income if you are trying to wrap your mind around the “how much” question. In addition, notice that investment in equity is coming last after all of the above. You are doing OK if you have a portfolio of mutual fund schemes that follow the Mint 50 list of funds. You’re choosing four to six schemes and funding them every month, never mind the boom and bust cycles.

How much should you be investing? Save your age. If you are 20 years of age, 20% of your income is good. At 30, with no assets to your name, you need 30%. At 40 and 50, likewise. Most people do have some asset build-up by the time they hit 35-40, so after counting in the 24% of basic that goes into risk-free EPF, it is safe to put the incremental amount into equity funds. We tend to make baskets of our investments and break up the monthly savings further into equity funds and safe fixed deposits. After all of the above steps are over and you have a number that you know you can save in addition to all the premiums, EMI, PF cuts, tax and all the rest, go solidly for equity funds. And you’ll do OK.