Guide to Financial Planning in India
How prepared are you for future goals like your Child’s education, Marriage, and your retirement? What happens to your family in case your sudden demise? Do you have sufficient coverage to make them financially secure? Does your family have the right amount of mediclaim to fend off any major event? If the answer to any one of these questions raises doubt in your mind then please read on.
Just like everyone, you have needs and aspirations. Let’s first talk about the difference between a “Need” and “Aspiration”. Need is must-have without which you cannot live or maintain your current lifestyle. Rent, Food, Utilities, etc are all examples of your daily needs. Aspirations are like desires or dreams that you want to fulfil in near future. Foreign vacation, Buying a car, Children higher education are examples of our aspirations. Both the needs and aspirations call for a financial commitment. And providing for these commitments becomes financial goals. You will experience happiness when you achieve these financial goals in a set period.
Believe me, it’s possible and you will also be able to do it in a simple passive way. You don’t have to spend hours in doing this. All you need is little discipline from your side. I know many people who had great jobs and businesses but still struggled with money. A good case in the point is the story of Singer Toni Braxton who went bankrupt. She had amassed a fortune of tens of millions but failed to manage her financial life. She declared bankruptcy in 2013.
If you are young, then time is one of your best friends in wealth accumulation. And time is the one thing that you will never get more of in the future. So that you make most of your precious time, start making your money work for you. Warren Buffet has summed it very well – If you don’t find a way to make money while you sleep, you will work until you die.
In the next few minutes, I will show you a 10-point action plan. This plan will help you realize your dreams while addressing your daily needs.
You are free to change this action plan to suit your needs. It has worked very well for me and my clients. These are the people whose case studies, I plan to put in this section in near future.
Please pay attention to what you read below. And feel free to adapt this list to suit your needs.
Pay Yourself First – (Habit of Saving)
First, make sure that you are NOT affected by AFFLUENZA – Affluenza is a disease to spend all the money on materialistic things only for show off or for belonging to a particular group. Buying a bigger home that will need a fortune for maintenance or that imported car which will lose its value rapidly and cost a bomb to insure. It erodes your wealth and put your financial goals in jeopardy.
Pay Yourself First means that you should always set aside X amount of money before you spend any money on daily needs.
For most people Saving = Income – Spending
But I want you to change this.
It should be Income – Saving = Spending.
Confused? What I mean is – First & foremost, save some amount to meet towards future financial goals. And only the remaining balance should go towards meeting your daily expenses.
I know that it is easier said than done but trust me this is an excellent habit to develop early. You can start with saving small amount first. And then gradually increase it every month to reach the amount that is required to meet your financial goals. Create a monthly budget to meet necessary expenses like food, housing, and utilities.
One simple way to start is to write your expense down every day. This small action will change the way you think about money and will help you analyze your actions with respect to money. Realization of where you spend your money is more important than anything. One of the few things I would like to pass on to Kids is the importance of writing it down.
Look – Without regular savings, you cannot achieve any financial goals and be happy in your life.
In terms of priority, you should always save first for your own retirement before saving any money for let’s say – children’s higher education, etc. They can get education loans. You won’t get retirement loans!
You may ask – how much should I save?
I will start with saving at least 10% of my monthly net take-home income, and then increase it to 30% by the end of the first year. The ultimate target will be to reach 50% of net income.
Keep Emergency Fund
Life throws googly at you and you don’t know what lies at the next corner. Emergency situations come uninformed and can arise anytime. There could be a setback to one’s earning capacity due to a temporary disability or there could be job-loss running into a few months. If you are not prepared, then this could impact your whole financial plan. So it is important to address this aspect which building your financial plan.
This fund should be equal to at least 6-8 times your monthly household expenses. It depends on person to person but 6-8 times of your monthly household expenses are good to start with. The household expenses should include All EMIs plus Insurance Premiums plus Kids Schools Fees plus Utilities and Groceries. It does not include your discretionary spending items like vacation, movies, dining out etc. The rate of Return is not important on Emergency Fund but Safety of Principal and Liquidity are very important. Make a promise to yourself that you will not touch this fund ever except in a true emergency.
Also please read this article here where I covered this in little more detail.
Get Health Insurance / Mediclaim – (Habit of Insuring)
For People without health insurance or mediclaim, hospitalization means having to pay all the money out of their own pocket or bank balance. Good hospitals and good medical treatment cost lots of money. Without health insurance, this could mean huge financial set back to an individual to the extent that one may have to sell their property to save a dear one. Thus, it is extremely important to secure your and your family’s health by buying a quality health insurance / Mediclaim policy.
Don’t buy health insurance / mediclaim ONLY to get the tax benefits under section 80. You need to assess your insurance requirements by considering your age, health, family medical history etc. Same should be assessed for your spouse, kids and other dependents as well.
If your employer provides medical insurance, it’s good but I would still advise you very strongly to get an independent policy to cover you and your family in case you lose your job or for some reason decide to leave it. It is important to get this insurance coverage as soon as possible because the insurance premium keeps going up with your age.
Read this article which is meant to assist you in purchasing health insurance, but please don’t get stuck in analysis paralysis. Most important take point is to GET Health Insurance / Protection immediately. Don’t delay it, Fix a deadline for yourself and ACT NOW. You might get declined for medical coverage later if you cross certain age limit or you are diagnosed with certain illness/diseases.
to be continued……