Developing a financial plan is important to determine how your existing assets and your future assets – which can be your greatest asset – are best allocated to meet your savings targets and at risks that you find tolerable.

If you are married, discuss these plans with your partner, as your savings plans for your future earnings may work better with your partners’ support.

Also consider seeking opinions from a (or more) financial advisor(s) who have had experience in managing savings’ budgets and making investments. This could be your distributor or your banker. Or seek experience from your close friends or relatives.

Consider making a budget, and checking where your income is spent over a number of months. You may be surprised or may find that you can make some additional savings by planning on how much should be spent for less necessary items over a period of time. You may find you appreciate and enjoy little luxuries – a family excursion to the beach, a new pair of shoes – more if they are in your little luxury budget!

Identify your Savings’ Goals

You will have personal goals that you want to reach that may be buying a car, an apartment or house, paying for your children’s education or any of many other things. You’ll need to make priorities depending on how much they might cost and when you want or need to reach that goal. Putting these on paper will help you agree with your partner.

Savings’ timelines

Different goals will have different timelines – until your children go to college, until you retire – and managing these may need compromises and advice from a financial advisor. To be successful in reaching your savings’ goals, the timelines are important. Normally if they are short, you will need to make investments with lower risk. With longer timelines, you can make investments with a higher risk.

Be careful though, because as time goes on, the timelines get shorter

You’ll need to re-consider your investment allocation (how much in low risk fixed income, how much in higher risk equities) the closer your timeline gets.

Defining the savings’ timelines is important to decide on your allocation of your savings into different investment types. Over time, your savings generate compound returns – the interest you earn on interest income, which is substantial the longer the time period.

Risk tolerance

People have different levels of risk tolerance, and your savings’ goals will also mean that your capacity for risk is different. It is important to understand both. You might feel comfortable with investing in gold, because your grandparents did, and have a high risk tolerance as a result. Or you might just feel uncomfortable in investing in other assets, because friends have lost money in the past, and thus have a low risk tolerance.

Look at the actual risks and how the cycles for various assets develop. Look at how the asset prices have developed over time and what information you can find on cycles that they might have. Consider your risk tolerance and consider whether a combination of various types of assets might be suitable for you.

Note though that your capacity for risk changes just as your plans and goals can. This can be when you get married or have children, change jobs or when you approach retirement.

Thinking and considering your risk tolerance and risk capacity is important so when you make your investment decisions, you will be more confident to keep to your plan even if the markets decline for a time. Often the best returns occur for the period following an unexpected market decline.

Changing your Savings’ Plan

It takes discipline to avoid an inclination to sell when the markets seem weak. Focused and professional investors look at these situations for the possibility of buying at cheap prices, so selling may mean that the potential upside is lost.

In theory, it’s best to buy when the market ‘bottoms-out’ and sell when the market peaks. Everyone can see that afterwards. But not even the best investors cannot predict market movements, and cannot identify when the market has ‘bottomed-out’ or has peaked until after some time.

Consequently ignore the bottoms and peaks, and look at the average returns over a year, or longer. These give a more realistic picture of the returns that have been more realistic in the past, and are better to indicate what the more realistic returns could be in the medium to long-run.

It is always true that past performance doesn’t guarantee future results. But if there is a lesson that the past can give is that for most investors it is better to keep to a steady savings’ plan once it is decided than to keep changing it when a market goes down badly or another goes up strongly and everyone is talking only about selling one or buying the other.

Often in these times the press gives the impression that either everything is doomed or that a new dimension has occurred and now everyone can get rich very fast. But just these are the times NOT to sell and NOT to buy – professional and disciplined investors try to do the reverse, and it is better to stick to the plan.

Consider adjusting your plan when your own circumstances change, not when the market shifts. Justify why your circumstances need a change. May be your timelines have got closer. Or your child has won a scholarship and the university fund is not needed! Don’t change only when the market shifts as shifts cost money and may be just at the worst time.

SIPs are a good way to make regular contributions according to your Savings’ Plan.

As SIPs allow small regular investments, four characteristics make SIPs very popular in established markets:
1. You can start early so that there is a compounding effect on your investment returns;
2. You have a long-term investment plan and less inclined to interrupt due to the volatility and cycles of the
    investments;
3. Your regular investments mean that you benefit from cost-averaging and from the upside of the volatility and
    cycles;
4. You can reach a degree of diversification with small investments in the ‘pool’ of an open-ended funds that is
    otherwise not possible at the same cost.