WHAT YOU CAN DO FOR A BETTER FINANCIAL FUTURE

WHAT YOU CAN DO FOR A BETTER FINANCIAL FUTURE

August 20, 2018

Written by Izbath Tarik

What is capitalism? An angle of elucidating it would be – ‘an economic system in which wealth creates more wealth’. Hence, you need to have wealth to produce more wealth. This brings us to the concept of investment. Because, putting away your hard earned cash under your mattress is not simply enough. You have to save and you have to invest the savings to generate more wealth.

One popular concept is the 50/30/20 rule. Essentially it prescribes people in their 20s to spend 50% of their income on basic needs like food, housing, etc. These are the expenses you would undergo no matter where you lived or worked. The following 30% of your income is entirely discretionary. It shall be used for personal expenditures related to the quality of your life. It includes your dine out bills, commute fairs, data package plan, etc. You can keep your personal expenditures on check to utilize what remains for the last 20%: your savings. It is a part of the holy grail of future financial solvency. The more you save in your early days the better it is; as it allows you to take full advantage of compounding.

Maybe you are just in your 20s and you are not at all concerned about your retirement. Just to give a reality check, you have already passed one fourth of your life. Your post retirement life will also be almost one fourth of your life or more. How can you spend 20 odd years of your life without any income or a hefty bank balance? Therefore you need to invest whether it be FDR or mutual funds or stocks or insurances.   

In a world where people have a hard time saving, ensuring that your money endures economic cycles and multiplies meanwhile is a whole different ball game. Continuous overview and oversee is not enough. You need a sound knowledge on finance and how money makes money or you could just hire a fund manager to look after them for you.

Expected return and risk appetite are the two most vital concepts you need a firm grasp on if you are to create a healthier financial future for yourself, your family and your future offspring. Expected return implies the rate of annual return you are expecting from your capital or savings. For example, if you have put away your money on a fixed deposit plan at a bank with an interest rate of 7%, your expected return is 7%. Even an FDR has risk. If the bank defaults you will only get your capital back. This is minimal risk appetite. In the financial world, you would be considered a risk averse investor. If you invest the same sum of money in stocks, you can earn returns from capital gains and dividend payments. However, stock prices fluctuate. The companies you invested in could be performing well but prices could still go down because of macroeconomic shifts. Your hard earned savings could all lay to waste. Nonetheless, if you know all these risks and still choose to invest in stocks, you could expect to see annual returns in excess of 20% even.

All of us have heard the phrase, ‘no risk no gain’. Here is the financial version of it, ‘More risk, more returns’. Finance managers segregate them into accumulation and preservation phase. It implies, in your twenties and thirties you accumulate wealth by taking on calculated risks. In other words, you invest in securities that do not ensure a fixed income unlike fixed deposits and bonds, but they present a higher upside. You have strolled past your 40s and you have just stepped into 50s. You are approaching the twilight of your career. Welcome to the preservation phase. Now you protect what you have. Furthermore, you generate a fixed cash-flow to boost your income and prepare for life after retirement. You move away from equities, currencies and commodities. You begin to invest in Fixed deposit plans and bonds. Now you have your annual salary plus the interest you receive from the fixed income investments. You can choose to reinvest those investment income too to ensure a safer post retirement life.

Here are some numbers. If you fixed deposited in a bank 10,000 BDT initially with annual addition of 120,000 BDT, 30 years later it would amount to 12.24 million BDT. If you invested the same amount in a mutual fund where you are expecting at least 12% annual return, after 30 years your investments would amount to 32.7 million BDT. After 30 years, if you invest your total capital into fixed income investments of even 6% annually, you will have an income of 2 lacs every month. By most standards, it is considered a pretty decent monthly income.

In Bangladesh, our financial markets are not as developed as many western markets. Yet, there are more options to explore if you want a secured future for you and your family. Some of them are pension funds and life insurance plans. There are varieties of life insurance plans suited to the needs and plans of every policy holder. Term life insurance plans offer security for a certain period. Permanent life insurance provides benefits to the beneficiaries upon death of the policy holder. Endowment life insurance is the best of both worlds. It offers coverage over a definite time while offering payout upon maturity. A separate piece needs to be written on life insurance industry itself. Thus, I won’t dig deeper into it.

Pension plans are fantastic for the risk averse investor concerned about retirement. It centers around paying a premium for a definite period of time while you are working in exchange for a pension income for a considerable period following retirement.

Why should you save? Is it all about life after retirement? There is so much more to life. Living the Bangladeshi dream of owning an apartment and a sedan while ensuring a standard education for your children should be more than enough to induce the minimalistic self within you. I dream to travel the world. The unrevealed traveler in me incites a frugal lifestyle in order to follow my passion and realize my dream. So, find your reason, find your goal. It will guide to save and invest for a better financial future.

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