Portfolio Ideas. Plan your finances step by step

You need to design a framework both at the macro-level and micro-level to effectively manage your investments.

For instance, we recently explained how to convert your investments into cash as you near the end of your investment horizon. These are the micro-level tools. In this article, we discuss six steps to creating a macro-level personal finance framework.

Fulfilling your goal The first step is to create protective assets. Protecting your family’s existing standard of living comes before trying to improve the financial wellness. Protective assets include an emergency fund and life and medical insurance, for you and your family members. You should not start your investment process unless your protective assets are in place.

Next, list all your life goals. This will help you channel your savings into appropriate investments. But how do you decide what a life goal is? One way is to check whether you can meet a particular expenditure using your current income.

For example, say you want to buy a car. The down payment for this is usually a small amount which you can meet easily. However, to buy a house, the down payment is a large sum; you need to save to build up that amount.

Therefore, buying a house becomes a life goal. You should also prioritise your goals. The goal with the highest priority is the one you cannot postpone. Now you get to the third step — managing your current income. You have to decide on how to allocate your income between savings and consumption.

One way to do this is to calculate how much you need to save every month to achieve your life goals, and then spend only the rest. Or, you could create a household budget for your monthly essential and non-essential expenses and save the rest. The fourth step is to make the investments. Use your monthly savings to map your investments to each of your life goals. Your investments will carry bank deposits and equity where necessary.

Each life goal should have separate investment account. Set up an automated process (systematic plans) to transfer your savings every month to the investment accounts. The fifth step involves managing your investments through its time horizon to reduce risks. For this, you should have pre-determined rules regarding taking profits on your equity investments.

You also need rules to reallocate money to fixed deposits from equity as you near the end of your time horizon. The final step is to have a contingency plan in case any of your investments falls short of the required wealth at the end of the time horizon. Your plan should also have rules to transfer money from the least-priority life goal accounts to the highest-priority goal.

You should also consider other measures such as borrowing money to bridge the gap.

Unforeseen life events Your life goals can change as you age. For instance, your income level could unexpectedly increase. Or you could face a medical emergency.

Sometimes, you may have to suspend your monthly investments and use the emergency fund to pay for your living expenses. In such cases, remember to top-up your emergency fund before you restart your monthly investment plans.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in

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