You are richer than you think you are, and you have far more financial resources at your disposal than your bank account balance would suggest. The trick to unlocking those lies in understanding the relationship
between money and time, and then having the discipline to abide by the rules that govern that relationship.
At this juncture, I will stop boring you and get straight to the point: If you are a 22-year-old professional who expects to have a career spanning approximately 35 years, for every Rs1,000 you save and invest appropriately every month of your entire career, you can expect to have the equivalent of over Rs3.4 million by the time you retire. And just to be clear, I am not talking about Rs3.4m 35 years from now. I mean an amount equal to what Rs3.4 million would be worth today.
Of course, I should add one big caveat: Nothing is guaranteed, and nobody can predict the future. But an educated guess would suggest that people who save diligently and invest wisely can amass a significant fortune over time, something that they can then rely on to help them through their sunset years.
Before explaining how any of this is possible, it is necessary to lay out a few basic ground rules of financial planning.
1. Know what you are saving up for, and how much time you have to save for it
Strange as it may sound, most people cannot list the biggest expenses they expect to have in their lives. In order of importance, they are: Personal retirement, house and children’s education. Weddings — your own or your children’s — do not belong on that list. If you can afford a big wedding, good for you, but if you cannot, do not waste your precious resources trying to impress relatives who will bicker and complain anyway.
You should also try to specify an amount that you plan to spend for each, and a date when you expect to actually have to spend the money. For instance, for the house: When do you want to be able to buy it? Ten years into your career, or 15 years? And do you really want to go after that 1,000-square-yard house in DHA or are you better off with a three-bedroom apartment in a reasonably safe neighbourhood?
Children’s education: To send abroad or within Pakistan? If abroad, where? How fast do educational expenses rise over time? And how much income would you realistically want during your retirement? Do not assume that your expenses will go down. They never do.
2. Invest aggressively early, but then grow conservative closer to retirement
It is important to understand the landscape of investments available and to very early set your own appetite for risk. Briefly put, your choices for investment span the following categories, listed in order of the risk involved, from highest to lowest: Stocks, commodities, currencies, real estate and bonds. Each has its own merits and comes with it own risks. And the following fact cannot be emphasised enough: There is no such thing as a truly risk-free investment.
So how risky is each investment, and how comfortable are you with each level of risk? How much should you allocate in each? The answer to those questions depends partially on your own preferences, but also on some basic rules. Generally, the younger you are, the more risk you should take. For someone in their 20s and 30s, for instance, having a portfolio of stocks only is perfectly acceptable.
3. Do not try to time the market
Take that advice with a pinch of salt. If you are a financial service professional or otherwise closely follow the markets and the economy, it is okay to occasionally try to time the market. But most people do not have the time to put in that kind of effort. In such a case, you are better off systematically investing in a diversified mutual fund every month. Have the money deducted directly from your bank account to the mutual fund, if need be.
Above all, do not get greedy and try to earn unreasonable returns overnight. That is asking for your very own personal financial crisis.
The above three rules are not exhaustive by any means. And you may have noticed that I have raised more questions than I have answered. That is the point. This column will address each of these questions and many more, in great depth, over the coming months, including things like: How do I invest in stocks? Where do I go to get a mutual fund? Also, what is a mutual fund?
Worry not, for all of these will be explained in due time. In the meantime, feel free to contact me by email or Twitter. I will try to answer your questions through this column.
One final note: While a working knowledge of mathematics is tremendously helpful in this era of online returns calculators and tutorials, it is no longer a prerequisite to understanding finance. So do not worry if you are not very comfortable with numbers.
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