Prioritizing the right goals is key to an investor's financial freedom
₹10,000 invested per month for 15 years in public provident fund PPF @ 7% per annum will grow to ₹32 lakh versus ₹50 lakh if invested in equities at 12% p.a. Experiential vacations, luxury car, if really important for the person, can be realized through bonuses. Of course, paying off debt should always be the first choice for lump sum funds.
Interest paid for loans compounds and hence it is better to be debt free at the cost of wants. For example, the interest on a ₹50 lakh home at 9% p.a. for 20 years would work out to ₹57,96,711.
A ₹5 lakh prepayment in the 8th year of the loan would lead to a saving of ₹8,16,775 in interest and reduce the tenure by 30 months. Often investors evaluate prepayments in rising markets as loss of an arbitrage opportunity and tax benefit. The arbitrage is not as simple as it seems as markets do no grow in a linear fashion and historical data shows most investors exit at the sign of volatility.
Thus using windfall gains to prepay loans is the way to go. Investing the leftover bonus needs thoughtful consideration. When markets are up and investors have disposable funds, they start feeling overconfident about their investing acumen and tend to get into high-risk investments like angel investing or complicated investments like fractional property, etc.
Bonuses need to be allocated to essential financial goals as explained above. Prioritizing financial freedom by choosing essential goals which tie in with one’s inner peace can make financial planning much simpler. Mrin Agarwal is founder-director, Finsafe India.Milestone Alert!
Livemint tops charts as the fastest growing news website in the world
