Setting aside a portion of your income isn’t just a recommendation; it should be an essential habit for leading a financially stress-free life. It’s no secret that many of our daily concerns arise from financial matters. Wouldn’t you agree? Everyone wants to save something from their salary on a monthly basis. But, many of us don’t know how to do it.
In this post, I have tried to allocate monthly savings to different investments based on my knowledge and experience. It can vary individual to individual and also don’t recommend to follow exactly, instead try to understand the allocation pattern and create your own one. In the vast landscape of financial planning, one size certainly does not fit all.
Every person has unique goals, risk tolerances, and timelines, so a personalized approach is required to design an investment plan. With post, you can create a robust foundation with aiming with your financial goals for the future.
Understanding Risk Profiles
Before diving into the specifics of savings allocation, it’s essential to understand risk profiles. Every expert in this field has divided the risk profiles into 3 categories – conservative, balanced, or aggressive.
Conservative Profile: it means allocate your savings with less risk or avoid significant impact of the market. It allocates less to the equity market and is usually preferred to those who have very little knowledge of financial investments. Those who want stability and are willing to accept lower returns in exchange for reduced risk.
Balanced Profile: Those who want a balanced approach in their investments. Not too risky, not to lower returns. You can have a balanced investment profile with some level of risk in lieu of higher returns but prefer to avoid volatility or higher risk through diversification.
Aggressive Profile: if you are growth-oriented and willing to accept higher levels of risk in exchange for higher returns, design a portfolio as aggressive. They are comfortable with market fluctuations.
It is preferred to those who have good knowledge of investment plans and have high risk of appetite. You can go with an aggressive profile, if you have an expert with you or know yourself how to manage funds and where to invest. You will need to regularly manage and diversify funds from time to time.
Crafting Your Savings Allocation
Now that we’ve defined risk profiles let’s explore how to allocate your savings effectively based on your risk tolerance. I repeat, I have designed this allocation as per my needs and future goals, you can change it.
1. Conservative Approach:
As, Conservative investors prioritize stability and security, requiring less allocation to equity or markets where fluctuations are more. Allotted more to debt funds and government bonds. A typical allocation might include:
- Debt funds (20%): Providing stability and fixed income.
- Government Bonds (15%): Offering low-risk returns.
- PPF (7.5%): Long-term savings with tax benefits.
- NPS (10%): Retirement-focused investment with tax benefits.
- Savings Account (10%): Ensuring liquidity with modest returns.
- Gold (5%): Adding diversification and hedging against inflation.
- Term Insurance (5%): Ensuring financial protection.
- Health Insurance (10%): Covering medical expenses.
- Equity Mutual Funds (17.5%): Introducing growth potential with lower risk.
2. Balanced Approach:
Balanced investors seek a mix of stability and growth. I have tried to achieve moderate returns with manageable risk. A typical allocation might include:
- Debt funds (15%): Providing stability with some growth potential.
- RD OR FD (10%): Safe investments with lower returns.
- PPF (7.5%): Long-term savings with tax benefits.
- NPS (10%): Retirement-focused investment with tax benefits.
- Savings Account (7.5%): Ensuring liquidity with modest returns.
- Gold (5%): Adding diversification and hedging against inflation.
- Term Insurance (5%): Ensuring financial protection.
- Health Insurance (10%): Covering medical expenses.
- Equity Mutual Funds (30%): Providing growth potential with moderate risk.
3. Aggressive Approach:
Aggressive investors prioritize growth and are willing to accept higher levels of risk. They have usually more risk appetite and are willing to take risk for higher returns. They know how to manage funds and diversify portfolios and where and when to invest focusing on growth-oriented assets with the potential for substantial returns. A typical allocation might include:
- Debt funds (10%): Providing stability but limited growth potential.
- Individual Stocks (10%): High-risk, high-reward investments.
- REITs or Real Estate (10%): Diversifying with income potential.
- NPS (5%): Retirement-focused investment with tax benefits.
- Savings Account (5%): Ensuring liquidity with modest returns.
- Gold (5%): Adding diversification and hedging against inflation.
- Term Insurance (5%): Ensuring financial protection.
- Health Insurance (5%): Covering medical expenses.
- Equity Mutual Funds (45%): Providing high growth potential with higher risk.
Conclusion:
You can change the percentage of allocation according to your requirements and goals, if you have any other investment plan. For a strong and long-lasting investment plan, you need to make sure that the way you spend your savings matches your risk tolerance.
You can build a well-diversified portfolio that fits your financial goals if you know how much risk you are willing to take and what your investment goals are. But, one thing always remember, try to invest your savings instead of keeping in bank accounts, as it is not going to yield you returns more than 4% which even does not beat your inflation (5-6%).
Remember to look over and make changes to your portfolio on a regular basis to make sure it stays in line with your changing goals and financial situation. You can confidently and clearly handle the complicated financial markets if you carefully plan how to spend your savings. And also keep learning and upgrading your financial knowledge on a regular basis.
