Financial Planning

WHAT IS FINANCIAL PLANNING?

Imagine, you recently got promoted and posted to a completely new city that you know nothing about.

The task is, you have to report to work the next morning but you have no idea about how to reach the office.

Being your 1^st day at work, you do not want to report late and your only goal at that moment is to show up to your new boss on time and create an impression.

So, what would be your course of action in this situation?

May be you’ll create some quick strategies that can help you achieve the goal (reaching office on time) and reduce your chances of failure. Some of the strategies could be:

• Asking someone in that city for directions and guidance.
• Following a navigator. OR
• If you can really take some extra efforts then you can travel to your workplace a day before your joining date and ask locals for directions, the preferred mode of transport, check out the road condition, the distance etc.

Basically, you will work out all possible ways to seek help from people who are more knowledgeable in that area and can help you avoid taking wrong turns so that you can reach your destination on time.

Financial planning is no different than that. You need to plan every little goal in advance no matter how small it is. Even if it is as small as upgrading your mobile phone or enhancing your insurance cover, it has to be planned.

A proper guidance combined with fine planning and disciplined approach can go great lengths in helping you achieve your financial goals on time.

Financial planning can be defined as a roadmap that helps you achieve your personal financial goals at ease and turning your struggles into celebrations.

Personal financial goals may include buying a house or a car, securing your retirement, accumulating funds for wedding expenses, pursuing higher education, starting a business and so on.

Financial Plan is like a navigator that shows directions to travellers and helps them reach their destination in the least possible time.

Not just that, it also shows that given the circumstances (traffic issues), how much time it will take for them to reach the destination so that they can atleast prepare for the suitable course of action.

It also helps them avoid taking wrong turns that deviates them from their destiny.

Likewise, a right financial planning helps you in making right financial decisions like

• Controlling over spending and under saving habits.
• Selecting right investment products that compliment your goals and risk appetite.
• Diversifying investment to mitigate risk and many more to help you achieve you financial goals in time.

 

 

WHY IS FINANCIAL PLANNING NECESSARY?

It is rightly said, failing to plan is as good as planning to fail.

Hence, it is of utmost importance to rigorously plan every step that takes you closer to making a financial decision or a commitment.

Undoubtedly, we always take decisions to the best of our abilities and go all out to make it right however; sometimes, even the best is not enough.

That is because out of limited knowledge and expertise, you may unknowingly take wrong financial decisions and miss out on important attributes.

Hence, if you are not 100% sure about what you are doing, please consider consulting financial experts or experienced financial planners who can craft a practical roadmap for you and get you going.

Also, start early.

The early you start, the easier it gets.

If you do not understand the importance of financial planning early on in life, you are bound to suffer later.

You will not only end up wasting your crucial years of investing where your responsibilities are few and savings are high but also lose out on massive advantage of power of compounding.

Let’s understand it this way.

If you have to travel from point A to point B, and the distance if measured in time is 1 hour then starting 15 minutes early will surely make your journey more enjoyable and less stressful.

Likewise, if you start saving from a very young age then besides making investments, you can also enjoy some bright moments of your life without worrying about future expenses.

 

 

ESSENTIAL ELEMENTS OF FINANCIAL PLANNING

There is nothing called a fool proof plan. The best of plans in this world are exposed to some level of risk and uncertainties and involve a possibility of failure.

Hence, the theory of giving your best and staying prepared for the worst is the strategy that works best in every given situation.

A healthy individual can fall sick anytime and even a highly talented professional can become unemployed for days or months together.

So, it’s great to put all your energy in staying positive, learning new skills and educating yourself but at the same time, you should be practical enough and ensure that you create a sufficient contingency fund to battle emergencies.

The following are some of the essential elements of effective financial planning.

1. Staying prepared for the financial crisis at all times – Financial crisis are like uninvited guests. It arrives when you least expect it. Though you cannot avoid them, you can always stay prepared.

Most of us live in a delusion that insurance policy is enough to protect us against any uncertainty in life. However, what will you do if your insurance claim gets rejected or the claim process runs into complications and takes too long to complete?

The expenses will not wait. Your family will still be liable to pay EMIs on time and manage other day to day expenses.

Especially, if you have a home loan, your loan provider will not give you more than 90 days to clear your dues before they declare your account “NPA” and start foreclosure proceedings.

Moreover, emergencies in the form of loss of job, untimely death, medical emergencies leading to reduction in capacity to work etc. where the insurance coverage is very limited and subject to many conditions and subjectivity can make things worse.

Hence in many situations, just having an insurance policy is not enough.

One should understand the importance of “Emergency Fund” that can instantly come to their rescue and something that they can blindly fall back on during such crisis.

It may or may not help them forever however, it can surely help them buy enough time to work out alternate solutions.

 

2. Securing retirement – Every individual dream of having the best days in their years of retirement.

However, the immediate question that follows is, are you doing enough to transform this dream into a reality?

Buying a 2^nd house property or more for generating passive income in the form of monthly rent, starting SIP in mutual funds at a very young age, investing in fixed deposits and various government schemes for stable and guaranteed returns etc. are some of the most common methods that people adopt to secure their retirement financially.

But, is it enough?

No doubt, these conventional methods are fruitful as they have become popular only because they were proved to be very effective and worked out really well for many senior citizens in the past.

So, you should continue to follow these tried and tested traditional methods while planning your retirement.

However, at the same time, we should not be ignorant about changing times and one important area that most of us miss out on i.e. investing in ourselves.

Mutual funds are subject to market risks and losses.

Real estate projects often get stuck where many people have lost fortune in this investment.

Fixed income instruments are safe but they are not good enough for generating inflation adjusted returns for you consistently.

So, what is the secret ingredient of having a peaceful retirement?

The answer is “Investing in yourself”.

“Education” and “Skill” is the only asset that cannot be lost, stolen or depleted. In fact, the more you share, the more it appreciates.

Though investment products generate passive income for you, they are largely influenced by factors that are beyond your control.

Investing in learning a skill or upgrading your knowledge is the only investment that can make you self reliant and help you generate decent income actively even after retirement.

Globalization has further made life easier, e-learning and online education market is evolving rapidly and gaining immense popularity. Technology has become smarter than ever.

So why not share your learning, experience and skills that you have developed during your active years with beginners who have just begun their career and looking for directions and guidance to do well in life.

Hence, keep working towards improving and developing your knowledge and skills and know that learning does not end after graduating from college but it begins there.

The lessons you learn in school and college can make you smarter but the lessons you learn from your experience and mistakes are priceless and make you successful.

So why not put this into a business plan and monetize it?

 

3. Boosting your investment – Irrespective of our financial status, we all aspire to live at least one dream that is beyond our means.

It may include upgrading our 1 BHK house to 2, 3 or 4BHK luxurious apartment OR sponsoring a vacation to our dream destination with our family OR driving a high end luxury car that once we had dreamt of.

The list goes on and on until the question “HOW?” kicks in.

We may or may not get another life. So why not make the most of this one?

So what should you do to financially prepare to live your dream?

Dipping into the savings that we have created for other essential goals like children’s higher education, marriage or retirement?

Obviously not.

Instead, you can consider reducing some of your unnecessary expenses and invest the savings in buying stocks of some ambitious companies which are of small or medium size today but have high growth potential.

But before you invest money in buying these shares, you need to first invest your time and money in learning the skill and developing the right attitude.

Of course, it is not an easy job and involves great risk.

A right and calculative move can double your investment but one mistake is enough to take everything away from you that you have made so far.

Hence, you will have to do a lot of exhaustive due diligence and research before stepping in but it is worth all your time and energy.

If you sail through these challenges, it will also help you cover the gap in case your other investments meant for fulfilling other financial goals underperforms.

 

4. Keeping your family protected at all times – Is buying insurance enough to keep your family financially secured in the event of your death? The answer is NO.

What will they do if the insurance claim gets rejected or if it runs into complications and the claim formalities takes too long to complete.

How will they repay their home loan and protect themselves from losing their house to the bank?

Imagining these situations itself are so horrifying.

Just think about the level of stress that people go through who actually have to live this nightmare.

No doubt, buying a life insurance is very important especially, if you are a bread earner of your family but at the same time one should not overlook other arrangements that are as important as that.

Making a will is as important as buying a life insurance especially if you own assets and properties and you want those assets to go to few specific members in your family.

Adding a nominee to all your investments and bank accounts is another task that is equally important to ensure that your family does not face any disputes and procedural hassles in claiming the proceeds.

Creating a contingency fund is most important than ever at every stage of your life.

The checklist is exhaustive and never ending, so a responsible person must get deep into the details of their finances in order to ensure their family’s security and well being.

 

5. Protecting your investment – Besides making investments for wealth creation, one of the most essential elements of effective financial planning is protecting the savings that you have already created over these years.

Imagine, an unexpected medical emergency occurs and takes away all your savings that you have created for the fulfilment of other financial goals.

What will you do when other financial goals keep staring at you later on in life.

If savings is not enough, you will end up taking a loan and make things more difficult for you as your entire investible surplus will then go towards the payment of EMI.

This will not just make your life miserable but also jeopardize your entire financial planning.

Hence, it is the need of an hour to understand the importance of having a sufficient medical insurance and reserves in place for battling emergencies and unanticipated expenses.

 

6. Building assets – Contributing towards monthly SIP in a disciplined manner is one of the simplest and the most common steps that one takes towards building an investment corpus.

Hence, the day you start earning, the first thing you must do is to open an investment account with any registered broker and start investing in mutual funds under professional guidance.

Then, buying a 2nd house property is another step that one must target for generating cash flow and ensuring financial security during their retirement.

The benefits of 2^nd house property go way beyond rental income and capital appreciation which is explained under a different section.

A home owner can even mortgage their house property post retirement to raise funds in case of emergencies while they continue to stay or earn rental income under the reverse mortgage scheme.

 

7. Tax planning – A penny saved is a penny earned is a very popular belief which is still widely used while planning investments.

It should be noted that every rupee earned or saved can be invested. The returns it generates can be further invested for more returns and so on. This is how power of compounding works.

So, every rupee that you lose to unnecessary expenses or tax, you don’t just lose the principal part of it but you also lose the returns that it could have generated in future. Hence, it is a need of an hour to treat every rupee important from a long term perspective.

Individuals earning more than INR 2.5 lacs p.a. are liable to pay tax in India. Especially, if your gross annual income exceeds INR 10 lacs p.a., you end up losing over 1/3^rd of your earnings to tax.

If you convert this percentage into numbers, your heart will sink.

Hence, it is important to stay updated with the basic tax saving rules and use it wisely. More importantly, make investments that not only help you save tax but are also aligned to your financial goals.

 

8. Debt management – Debt refers to any money borrowed from individuals including friends and family or institutions like banks or private lenders that you are liable to pay back with or without interest.

Loans including credit cards are one of the most common forms of debt that we use in our day to day life for various purposes.

Though banks and financial institutions portray loans as your friend in need whenever you need money, one should understand that not all loans are good and you should be very careful about what exactly you are availing a loan for.

Loan EMI often eats up the major portion of your salary that not only affects your current cash flow but also have long term implications as you go on to take a hit on your savings and investible surplus.

Hence, as a responsible saver, you should be very selective while making purchases on credit. Use credit cards only for buying essential items.

Take loans that help you build appreciating assets like properties and create cash flow and stay away from those that only create liabilities and eat up your income for nothing but a temporary pleasure.

Buying a house on loan is a positive move as it helps you create an appreciating asset in long run and also generate cash flow.

Moreover, it has the lowest rate of interest, longest tenure that is good enough to keep your EMI low thus leaving enough room for other investments. Additionally, you can also avail tax benefits that eventually boost your monthly take-home income and investible surplus marginally. Hence, buying a house on loan should always be looked at in a positive light.

Likewise, there are many more credit facilities that exist in today’s era that can be availed for various other purposes. No doubt, the facility has made many essential things accessible to a common man however, one should be mindful of the type of loan that they are signing up for, the interest being charged, hidden or unspoken terms and conditions etc. Especially in cases of high interest products like personal loans and credit cards.

Credit card is one of the most wonderful inventions that a common man can think of but only if used responsibly otherwise, it can cause massive destruction in one’s financial life.

However bad the situation is, avoid making the following mistakes.

• Swiping a credit card in an ATM for withdrawing cash.
• Paying minimum amount due and rolling your previous month’s balance to the next billing cycle.
• Using it impulsively for buying unnecessary items should be strictly avoided.

It is always advisable to get your basics right before signing up for any financial instrument. Rather be safe than sorry.

Also, if you have too many expensive loans like personal loans, credit card dues, car loans etc. you can close them with a cheaper loan like a home loan top-up in case you are eligible to avail it.

Top-up loan is the cheapest personal loan available and is given against the security of the house that you have mortgaged.

Hence, managing debt is very important to lead a stable financial life.

 

9. Managing cash flow – Cash flow is the difference between the income and expenses.

If your monthly income is higher than your expenses then you are said to have a positive cash flow as you are able to save money after settling all your bills.

On the contrary, if your expenses overshoot your income and you are struggling to make ends meet then you are said to have a negative cash flow.

It is quite obvious that everyone would like to have a positive cash flow as it not only helps them manage their current expenses comfortably but also help them in creating investible surplus.

On the other hand, individuals with negative cash flow either compromise on their lifestyle and other necessary expenses or they borrow which further makes their financial life more complicated as they move on in life.

Now, why do some people have negative cash flow wherein those with similar income and expenses are leading a comfortable life?

One of the most common reasons is “Lack of Planning”.

As a responsible saver, one needs to be a little foresighted and plan all their future expenses.

Some of the most common expenses include wedding expenses, creating reserves for insurance premium, children education, upgrading the house or a car, taking a vacation and so on.

If planned well, they can start saving for these expenses well in advance and by the time the expense becomes due, they will be ready with the money they need. Hence, without disturbing their current cash flow, they can comfortably keep going.

Hence, it is very important to identify and plan your expenses well in advance in order to keep your cash flow on track.

 

10. CIBIL records – Loans these days is not just a facility but a necessity since consumers are becoming more and more dependent on loans for satisfying most of our day to day needs.

These needs may include buying essential items ranging from a mobile phone, groceries, clothing to as big as buying a house.

Hence, it is a need of an hour to be well aware about what influences your CIBIL score and ensuring that your CIBIL score always remain in good shape.

For this, besides making your loan repayments on time and being a good borrower it is also important to check your CIBIL score from time to time and keep any irregularities or surprises at bay.

 

 

STEPS IN FINANCIAL PLANNING

Planning is a stepping stone to a successful financial life. The better you plan, the happier you will be in future.

 Hence, every individual must take up a financial planning exercise very seriously and craft the plan in the following manner.

1. List down your financial goals – To begin with, you must first list down all your financial goals that you want to achieve in future. The financial goals may include your retirement planning, buying a house, upgrading a car, securing parent’s future etc.

For ease of understanding, let us consider “Retirement Planning” as the goal in all of below mentioned points.

 

2. Assign timelines to your goals – A goal must be time bound. You need to assess the number of years remaining for your retirement (“x”), the amount of money you require after your retirement to lead a comfortable life, your life expectancy and the amount you need to invest today at a given rate to create a desired corpus.

 

3. Find out the present cost of the goal – Find out the amount of money required by you if you had to retire today to lead a comfortable life.

 

4. Add inflation – Since we are planning a future event, calculate how much the amount (the present value) will be worth after the “x” number of years taking into account the inflation.

For this, calculate the present cost of living, find out the rate of inflation applicable and multiply it with the number of years remaining for your retirement to derive the target amount.

 

5. Take stock of all available assets – Now, it’s time to assess where all the money will come from.

For that, make a list of all available assets that you can dedicate to your future financial goals.

 

6. Assign the assets to each goal – Out of all the assets you have, shortlist few that you can assign towards creating your retirement corpus.

 

7. Calculate the shortfall – The difference between the funds available and the future cost of the goal will decide the amount of money required to be invested every month and in what products.

 

8. Identify the deficit – Identify the gap between what you can invest and what you need to invest to create a retirement fund.

If case of shortfall, you either need to enhance your contribution to SIP or invest in riskier instruments that can generate much higher returns for you (it also involves higher risk).

If either of these is not possible, then you will have to either delay your goal or reduce your expenses or look for alternate income source to chip in more to your monthly SIP.

 

9. Create an investment plan – Once you have the numbers in place, create a plan involving assessment of your risk appetite, the amount of SIP required, minimum returns the investment must generate, investment products, how to diversify investments across various asset classes and start investing.

 

10. Review the plan every year – Check the performance of the investment every year and make suitable changes whenever and wherever required.

 

 

IMPLICATIONS OF POOR FINANCIAL PLANNING

Financial planning is all about aligning all the available financial resources to your future financial goals. Missing out on any of the important attributes can leave you in a very compromising situation later.

Hence, it makes all the sense to take help of a well qualified financial planner who will not only help you create a road map but can also help you foresee all possible roadblocks that you are likely to encounter in future and help you prepare to survive the deepest financial crisis.

A poor financial plan can have the following implications in your life.

1. Not having enough money when you need it – Two primary purposes of financial planning are:

• Ensuring that you have money when you need it.
• Ensuring you are financially ready to fight every life event that stops you from achieving that goal.

For this, you need to have a basic understanding of all financial products and mastery in numbers and calculations. Any important attribute if overlooked can have a huge impact on your financial life.

If your financial goal is to make a down payment of your house in a year and you start SIP in ELSS funds where the funds are inaccessible to you for 3 years or you want to plan for retirement and you choose Fixed Deposit (FD) as an investment vehicle where the liquidity is high but the returns are poor enough to even beat inflation.

Imagine, the goal is to create a retirement corpus for your golden years and you do not having sufficient money to make ends meet after retirement.

Unfortunately, besides losing your regular source of income, you also lose access to any loan facility for this goal except reverse mortgage which is only available to home owners.

This clearly explains the importance of prioritizing goals early on in life.

 

2. Debt trap – Why is loan industry flourishing so much these days? The reasons could be many including increasing greed for better lifestyle, rising income of common people who can now make down payments and afford better things in life, easy access to certain essential facilities which otherwise would have been impossible like access to premium educational institutes, bigger house and so on.

But one of the most common reasons, why the dependency on loans is increasing more and more these days is POOR FINANCIAL PLANNING.

Buying a house, upgrading a car, taking foreign trips etc. are some of the most common dreams that we can always plan early on in life however, we still rely on loans to fulfill such requirements even years after we start earning.

Moreover, these loans are more damaging as they are being offered at a much higher rate with no benefits in return.

Some middle aged individuals still struggle to make a down payment of their 1^st house and end up stressing their finances beyond limits by exhausting their line of credit.

Unknowingly, they are simply getting drawn to a debt trap where they end up losing lacs of rupees to high interest payments which otherwise could have been used for creating wealth.

If these things were planned early on, the dependency on loans could have been reduced to a larger extent. Hence, you must begin your financial planning exercise right from the day you start earning.

 

3. Stress – If you do not know how much money you will need to achieve a particular goal after 10 years, you would not know how much money you need to save today and if you do not know how much to save then you will simply end up over spending and under saving.

Under saving will eventually hit your investible surplus which will then result in increasing stress level as you near your goal. Increasing stress will further lead to many diseases which will add to your medical cost and stress.

This all could have been easily avoided by simply acting responsibly and practising some financial discipline.

Hence, financial planning should be looked at as a very important exercise and if you do not have a required knowledge and expertise then look for a guidance and assistance from someone who does.

 

4. Losing important assets during crisis – Buying a house is one of the greatest financial achievements of every common man.

However, they are always at a risk of losing it if they stop servicing their EMIs.

If your bank for any reason stops receiving payments, they will give you not more than 3 months to clear all pending dues.

Post expiry of the deadline, they will start to recover their money by selling your property.

Imagine, all of a sudden, something happens to you and your family is left with nothing but 2 choices.

• Either make arrangements to repay the HOME LOAN OR
• Lose the house.

Nobody would want their family to land in this situation whatsoever. Hence, these possibilities should never be ignored during the financial planning exercise and your HOME LOAN should always be covered with the basic .

 

5. Losing your hard saved money to medical expenses – This has reference to a health and accidental insurance that many people still look at as an expense.

Taking into account the medical inflation these days, a decent medical treatment has become highly inaccessible to a common man.

A medical bill even for a day spent in a hospital for a minor injury or illness runs into thousands and having no insurance coverage at that point will surely put you under severe financial stress.

In such scenarios, most of us are left with no choice but to resort to shortcuts.

Some people may consider asking their friends and relatives for help while others may dip into their lifetime savings that they have created for other financial goals.

In such cases, what will they do when their other financial goals become due?

In worst cases, some are even forced to take personal loans that make their life miserable. This is how the loan industry is flourishing so much nowadays as many of us still treat financial planning as needless exercise.

Hence, it is a responsibility of every individual to get themselves covered with the basic health and accidental insurance to protect their and their family’s future financial life.

Moreover, in case, you have a family history of any specific disease or you are exposed to a risk of any lifestyle disease then it is advisable to get yourself covered with a critical illness plan for those illnesses. For example, buying a cancer policy if you a regular smoker or if you are engaged in a very stressful job or a profession.

 

6. Leaving family stranded after your demise – Bread earners are responsible for their family’s well being even after their death as much as they are when they were alive.

In order to secure them financially, they must first get themselves covered with the basic term insurance so that their family’s financial standing and lifestyle are not affected even after their death.

However, does simply buying a life insurance make them 100% secured?

The answer is NO.

Insurance claims are subject to many conditions and processes. Due to this, there is a good chance that your insurance claim may get delayed due to a rigorous investigation process and disputes or in worst cases can also get rejected.

So what will your family do in the interim?

If you do not have an answer to any of these questions then the next step that you should take is to create enough savings for your family to help them survive this eventuality. The savings can be in the form of liquid assets like fixed deposits, mutual funds etc.

The savings may not last forever but it can surely work as a cushion and help them buy enough time to look for an alternative or find a decent job.

Also, one needs to ensure that all their investments and properties have nominee details updated. This will ensure that their loves ones do not need to run from pillar to post when they need your money the most.

Creating a personalized “Will” and dividing assets is another point that should not be overlooked or under estimated. This to an extent will rule out or reduce any unnecessary legal complications and litigation that your family may face in your absence.

There are a lot of online portals that offers readymade draft and services for creating a will however, one need to ensure that the “Will” is personalized according to their tailor needs and family structure and not general for all.

Further, some events like disability and job loss may fall beyond the scope of life insurance cover. And buying a cover for such events may be very expensive.

Hence, one needs to be prepared for anything and everything to help their family stay protected against all such risks at all times.

and Many more…

 

 

COMMON MISTAKES YOU MUST AVOID WHILE PLANNING FINANCES

1. Blindly following the friend for advice – A confused investor always has a tendency of reaching out to their friends and relatives for suggestions while making critical investment decisions.

That happens irrespective of the knowledge and the level of understanding their friends have about the domain. It is as good as asking a truck driver, how to fly an airplane.

Such free advices, in some cases, multiply your troubles as they are based on their individual experience or opinions and hardly on calculations or facts and figures.

Hence, instead of blindly following a casual financial advice of a friend, investors must act wisely and take assistance of a well qualified financial planner who has sound knowledge about the domain.

 

2. Having indisciplined approach while investing – Discipline is one of the most important elements required for successful planning whether it is about health, career or investments.

Discipline is one of the most important aspects that many investors lack.

The following are some of the ways to start practicing discipline while investing.

• Start investing as soon as you start earning.
• Invest before spending.
• Do not dip into your investment kitty that is meant for other financial goals.
• Do not skip monthly SIP.
• Do not let emotions dictate logic.
• Be slow and consistent but do not stop.

 

3. Investing only to save tax – One of the most common mistakes investors often make is to buy financial products with the sole objective of saving tax.

This happens mostly with people who wait until their employer starts chasing them for investment proofs for claiming tax benefits for the year.

Due to this urgency, they hastily buy products that completely mismatch their financial goals. For example, investing in PPF with a lock in of 15 years or investing in long term traditional insurance policies with the term of 10 years or more where the investor has cash requirements within 3 to 4 years.

A group of such investors is the most vulnerable group to misselling where certain banks missell insurance products to them left, right and center on the pretext of false commitments.

Hence, investors should act wisely and be organized enough to plan their investments at the beginning of the year taking into account their future financial needs.

 

4. Buying insurance without proper planning – Insurance planning is one of the most sensitive areas of financial planning.

If planned haphazardly, it can have devastating effects in one’s dependant’s life when they are already going through a lot of stress due to many reasons other than financial troubles.

One should note that under-insurance is as good as having no insurance at all.

Not having enough money when needed hardly does any good to the beneficiary of the policy. Hence, whether it is a life insurance, health insurance or any other form of insurance, one cannot afford to go wrong with numbers while doing insurance planning.

They should take into consideration all possible factors including human life value, cost of medical treatment, medical inflation, financial obligation, household expenses and so on.

 

5. Prepaying a home loan at the cost of other goals – Paying off a home loan is one of the most satisfying feelings for every investor.

However, does that really help you enough?

It should be noted that repayment of home loan is not our only financial goal. When we choose to repay a home loan, we somehow get detracted from other financial goals and unknowingly put them at risk.

Home loan is not only the cheapest source of funds but also involves certain tax benefits that help us enhance our take home salary. So, it is better to have a home loan than having any other loan.

Hence, investors at every point should be very conscious about their investment mindset.

The money that you plan to use for the pre payment of your home loan could have been invested for better returns that can help you meet other financial obligations in future.

Secondly, instead of paying off a home loan, one can always sign up for a smart home loan facility, park their lumpsum amount in their smart loan account, reduce their balance and start SIP in some good quality equity funds that invest its assets in high quality stocks of bluechip companies.

This way, they can derive dual benefits out of the same funds. They can not only start saving interest on their home loan but also start the process of creating an asset base for wealth creation and meeting other financial needs.

Hence, debts should never be looked in a negative light. If managed wisely, debts can help us create good amount of assets and make our future bright.

 

6. Concentrating investments on one asset class – Failing to plan is as good as planning to fail. This theory holds true even while making investment calls.

Over concentration of investments under the single asset class will eventually lead to over concentration of risk as well.

Many investors are emotionally attached to one particular asset class and heavily invest all their money into that asset class only. For example, a large of group gold lovers prefer to invest all their money in nothing but buying physical gold without realizing that gold as an asset class is highly volatile.

Any unfavourable event can erode the value of their entire investment. Hence, investment decisions should always be based on logic and not on emotional force.

If for any reason, the value of investment belonging to one asset class crashes then your entire investment portfolio will come crashing down.

Imagine, if the goal for which the investment was created, is few months away from the downfall, what will you do when that expense becomes due and you do not have enough money to accommodate those expenses.

Hence, smart investors always foresee such possibilities and diversify their investment to mitigate risk.

The fall in the value of one investment sometimes results in the rise in the value of other investments. For example, gold and equity markets have reverse effects on one another. When the equity market looks sluggish, the gold shines and vice-versa.

 

7. Investing in products you do not understand – Many individuals easily get influenced and make investment decisions based on recommendations they receive from their friends and relatives without verifying their understanding about the domain.

Sometimes, they take help from professionals but still get deceived as such professionals are either not qualified enough to understand their unique needs or sometimes they purposely missell wrong products for personal gain.

Due to these challenges, investors end up investing in products that completely mismatch their future financial needs and eventually fall short of funds when their financial goals becomes due.

Hence, as a responsible investor, we should work towards acquiring some basic knowledge and understanding about products that we are intending to sign up for.

We are already living in an information age where knowledge is just a click away. Hence, one should consciously study all pros and cons of investments they are getting into including the lock in applicable, tax benefits involved, risks involved, minimum returns it can generate etc.

 

8. Relying on company insurance alone – Many individuals believe that a group insurance provided by their employer is sufficient to take care of all their insurance needs.

They rely so much on their employer provided group insurance that they become completely blind to risks and complications involved in not having a personal insurance coverage.

It should be noted that the group insurance will only take care of your general injuries and sicknesses as long as you are employed or the group policy is in force.

There are various situations that justify the importance of having a personal insurance. The following are some of the risks involved in not having a personal insurance.

• No insurance post retirement – Benefits of group insurance only exist as long as the insured is employed. On retirement, all the employee benefits including insurance coverage ceases and buying a personal insurance at that age could be a very costly affair due to the age factor.

Also, with age, we develop various illnesses and that become pre existing at the time of taking the policy.

Young individuals on the other hand are usually healthy due to which their insurance premium is low.

 

• No coverage for laid off employees – Layoff is a situation where a large group of employees are asked to leave the company temporarily or permanently due to various reasons at organization level.

Besides regular salary, laid off employees also loses all the benefits that they are entitled to from their employer.

In the event of lay off, even their insurance coverage is withdrawn. If the individual develops any health issues or meets with an accident during this time, they will have to manage all the expenses from their personal savings including hospital bills and cost of medical treatment.

 

• Scope of cover keeps changing – Group insurance is subject to renewal every year where certain terms are reviewed each time they are renewed and subject to change depending on the number and the amount of claims in the previous year.

The insurance company may either negotiate for higher premium or narrowing the scope of coverage. The employer usually opts for later as they do not want their cost to overshoot due to which some of the benefits under the insurance contract are either reduced or withdrawn.

In such cases, the employees who were earlier enjoying the benefits of superior insurance coverage are now helpless as their value of cover is lowered and the scope of exclusions is widened.

 

• Specific needs are not addressed – Insurance needs of every individual is unique and insurance companies accordingly design range of products that addresses every individual’s specific requirements.

Group policies on the other hand, usually cover general illnesses and common injuries only and the specific health issues of such individuals go unaddressed.

Availing any treatment that goes beyond the scope of such policies are not covered and all the medical expenses then go from the pocket of such individuals.

 

• Waiting Period – If the personal insurance policy is purchased after retirement, certain pre existing illnesses will be subject to waiting period as the waiting period starts from the date the policy is issued.

 

 

MONEY MANAGEMENT TIPS

1. Never underestimate the value of insurance. In certain situations, insurance can be a supreme support to you and your family when you are either helpless or not available.

 

2. Create a contingency fund that can accommodate atleast 6 to 8 months of your monthly expenses.

 

3. Buy a separate health and life insurance cover over the group cover offered by your employer.

 

4. Never withdraw the returns from your investments. Let it compound.

 

5. Invest in SIPs on different dates to maximize the rupee cost averaging.

 

6. Have at least 1 house property that you can put on rent. Benefits of investment house property goes much beyond the rental income and tax benefits.

 

7. Money should either be spent or invested. If left idle in savings account then it will lose its value to low returns and high taxation. Hence, any excess cash should be parked in liquid funds. It generates better returns with lower tax liability. It also offers instant liquidity.

 

8. Use 2 credit cards. One for necessities and other one for the lifestyle expenses. This will help you track unnecessary expenses and eventually control it.

 

9. Create reserves for unexpected expenses like Home Repairs, Car Repairs, loss of mobile phone, Medical Issue, Breakdown of Home Appliances and gadgets etc. You never know when these expenses may occur. If it comes up at a wrong time then you may face financial crunch.

If you don’t prepare for these expenses, you will either have to compromise on some other important expenses or you will be forced to swipe your credit card, roll over the credit, dip into your savings, skip the investment or borrow from friends/family.

 

10. Save every month for unavoidable and obligatory annual expenses. These are known expenses which are bound to occur like school fees, insurance premium, health checkup, car maintenance, plan to upgrade gadgets etc.

Imagine, you have an insurance premium due and in the same month your car breaks down or AC stops working in summer. This will unnecessarily stress your finances and force you to either take a hit on your investments or take a loan or borrow from friends. If you cannot fill this reserves bucket completely then start with small reserves.

 

 

A PIECE OF ADVICE

1. Do not mix insurance with investment – Many banks are engaged in a practice of aggressively selling insurance cum investment products to people who hardly understand them. All this to only pocket fat commissions.

If you ever follow investment advice of representatives from any of such banks, you are bound to get cheated and all your investment money will go into products yielding very low returns and the insurance component that will also be insufficient when you really need it.

This is because investment products with insurance benefits are subject to mortality charge to cover the insurance component and that to an extent dilutes the overall gains you earn from your investment.

Likewise, the insurance component it includes is also small enough to make an impact as major portion of your contribution is invested for better returns. Due to this, the amount of insurance coverage you receive is too low to serve the purpose when the claim arises.

Hence, as much as possible, always keep the insurance and investments separate. Make investment in good quality mutual funds for better returns and buy a regular term plan or mediclaim to enjoy complete insurance benefits.

 

2. Give retirement a priority – Retirement can be the best or the worst phase of your life depending on the choices you make today.

Post retirement, your cash flow is restricted as you not only lose your regular source of income but also become ineligible for any loan facilities accept “Reverse Mortgage” which can only be offered to home owners.

Hence, under any circumstances, you cannot afford to have a shortfall at this stage of your life.

Your financial standing at this stage should be so strong that you should be able to go on for years without relying on anything but your savings. Any other financial goal can either wait or can be supported with a loan facility if you fall short of funds.

Hence, retirement planning should be at the top of your priority list while planning your finances.

 

3. Do not dip into your retirement corpus for current financial needs – Many people have a common tendency of dipping into their retirement corpus for fulfilling their short term financial needs. It should be understood that the retirement corpus is meant for fulfilling their post retirement expenses only unless they encounter a grave emergency.

On retirement, you will not only lose your regular source of income and become dependent on your savings but also become ineligible for any loan facilities to bridge the gap between your ends and means.

Any short term financial needs during their young age can be met either by borrowing or exploring options other than dipping into their retirement corpus.

 

4. Factor inflation while doing investment planning – Investors must be very careful while taking inflation into account while planning their investments. Many investors still consider the standard inflation rate of 6-8% for all financial goals which is incorrect. The rate of inflation for different expenses is different.

Inflation is a general increase in prices of goods and services over a period of time. It is different for different goods and services. For example,

• The education inflation in India ranges from 12-15%,
• Likewise, the medical inflation ranges from 15-18%,
• The food inflation ranges from 6-8% and so on.

So, calculate corpus according to the rate of inflation applicable to that particular category.

 

5. Create an emergency fund – Emergencies are like uninvited guests. They arrive when you least expect them. Hence, you must always be prepared for anything and everything that life throws at you.

Emergency fund is like a protective shield that you create to protect yourself and your family from financial crisis resulting from uncertain events like untimely death, medical emergencies, loss of job, family disputes etc.

Emergency Fund should cover all essential expenses for the minimum of 6 to 12 months. These essential expenses should include:

• Your monthly household expenses.
• Annual obligatory expenses like insurance premium, car repairs, Q4 tax deduction etc.
• Children education.
• Loan EMIs.
• Investments you make towards fulfilling your future financial needs.

Also, the duration or the number of months for which the fund should last shall depend of the following factors.

• Number of dependents in your family.
• Number of earning members in the family.
• Value of liquid investments as on date.
• Educational qualification.
• Time required for finding another job or an alternate source of income and so on.

 

6. Use credit card responsibly – Credit card is a wonderful invention as long as it is used appropriately. If not, it is enough to breaks one’s financial life completely and result in never ending financial crisis.

It is one of the most widely used payment facilities by many, especially impulsive shoppers as it gives them enough comfort to spend money without having to pay at that very moment.

The biggest mistake shoppers make here is that, they get carried away with offers and discounts end up spending more than what they can afford. Moreover, they spend money on things they don’t need and after they get the bill, they regret making that purchase.

The best way to handle this is to delay the purchase for a week or a month and see if you really need that item. If you still need it then go and buy it but there is a good chance that you may consider dropping the idea of buying it.