Investment advisor Sanjay Matai says, "The focus, now, should shift towards newer products such as equity mutual funds." Since Divya is a long-term investor (remember: she doesn't make withdrawals), equity is the best vehicle for her. Equity will give her returns of 15% over a long period of over 10 years. Equities are also more tax-friendly than debt products like FDs.

Budgets are so boring

Divya confesses, "I am good at saving but I am not good at accounting for the balance money."

"The best way to deal with this", says Kartik Jhaveri, "is routing all your financial transaction to be made through credit cards. Allocate one specific credit card for a particular expense. This way, it is easier to track as it allows you to check your monthly statement online as and when you require."

Another way is to do a backward calculation. Out of your total income, 30% would go toward taxes. Thereafter, ensure that:

- Your debts (EMIs) don't exceed 30%.
- You set aside at least 4% for insurance.
- You invest at least 15%.

That leaves around 20% for expenses. Any expense over and above 20% should be flagged as over limit.

Emergency fund, er...what's that?

Think you don't need one? Well, the Mumbai floods (of July 26, 2005), were not anticipated either. Ill health and job loss are also common emergencies. So set aside some money for an emergency. Roughly three months' salary can be kept in a liquid mutual fund so that it is accessible in emergencies.

Retirement? I'm still 20 years away! Divya admits, "I have not given a thought to my post-retirement financial needs." Well then, this is the best time to plan!

If Divya spends Rs 6,000 per month or Rs 72,000 per annum today, at an inflation rate of 5%, that would be Rs 3.11 lakh per annum after 30 years.

Post retirement, her regular income stream would stop and she would need to make sure her investment income can generate that amount. Of course, expenses like healthcare and medical would shoot up too by then.

Retirement planning is best done at an early age. By setting aside small sums every month and investing them in equities, Divya can meet her retirement needs.

With this new strategy, Divya can easily keep a track of her money and she can also invest in products that will give her good returns. It is time to bury your bad money habits and supplant them with effective and logical money habits.

Author: Gayathri Madhavan