Ten important aspects to be considered during financial planning!

Ten important aspects to be considered during financial planning!

In current times, it is important to have a financial planning towards gaining rich life. It is important to save at least 10% at a minimum and 30% at the maximum from your salary. More important than that is to invest your savings on schemes that fetch you more than what would be lost due to inflation.

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There are many who complain ‘How can I save money from the meager salary I earn? It is difficult even to manage a month without borrowing money’. It is useful for those who complain so to have a positive attitude within themselves. If one thinks it is not at all possible, it is difficult even to save one rupee. If one begins with a positive note that it is possible it is for sure that we will be able to save at least a few hundreds.

Rs 1 crore corpus fund – How much is the monthly investment?
 

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* Company shares, equity based mutual funds
** Fixed deposits, debt mutual fund

We should develop a habit of being currently frugal, considering our future. It is the intelligent way to be one among those who have that habit. What needs to be done for that? If all members of the family, father, mother and children, sit together in one of the holidays and discuss about the savings plan it is sure that some of the unwanted expenses can be minimized so as to save for the future.
Some of us think that only if one has a huge sum of money it is possib

le to invest it. But even if one has only Rs 100, one can start with RD or invest in mutual funds. I have witnessed some of them who started with Rs 100 have evolved in to increasing their investment to Rs 1000.

Before trying to save for the future, you should have a clear vision and understanding about what needs to be done and what not. Many of us invest on some insurance policies and mutual fund schemes just because of the recommendations of some  agents. It is a wrong practice. Right planning that is going to follow should consider the following ten aspects.

Insurance

The first step in financial planning is to take insurance. It is essential to have insurance for a person at the rate of 12 times of the person’s annual income. The moment insurance is mentioned many ask the question, ‘Sir, can we get what we pay for insurance?’ They raise this question as there is lack of proper understanding about insurance policies. We insure the bike we own at our home. We don’t insist that we will insure only if we get back what we have paid. Even if we insist the law prohibits that. Similarly, even if we don’t get back what we have paid as premium amount on insurance, we should buy term plans that provide you high compensation amount for the very low premium amount we have paid. Then only we will have money to invest on for other needs.

If a person of 30 years insures for 25 lakhs by paying premium for 30 years, the premium amount annually will be Rs 5000-6000 only. There is tax exemption for that amount and we can pay that small amount for insurance and invest the remaining amount for other needs.

When it comes to insurance policy, we should not stop with getting only term insurance which covers only life. It is very much essential to have health insurance for the whole family. It is better to have floater policy at the lowest price that covers all members of the family. The coverage would be Rs 3 – 5 lakhs on the policy. The annual premium for that coverage will be Rs 8000-10,000 annually. It may vary based on age and hence it is advisable to take when one is young.

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Emergency Expenditure

With the present condition, we cannot predict how a particular emergency situation would emerge. Someone in the family might get sick or we need money to pay a particular amount to the school or college where our children are studying. At this time of emergency situations, many of us are forced borrow money to manage or tide over the problem.

Even if we have health insurance policies we could get only a limited amount of money through those policies. If we borrow money we should be able to pay for the principal and interest amount as well. Emergency fund is meant only to manage these sorts of situations without much hassle. This amount should be 5-6 times of the monthly expenditures of a family. This amount should be more at the time of youth and should be lower at the time of retirement.

This amount should be kept in such a way to make use of it immediately when required. So it can be kept in different forms such as bank savings account, FD, liquid mutual fund. Some invest on gold in order to have it converted into money at the time of emergency. But it is better to keep it in the form of liquid fund.

Retirement Plan

Though many expenditures that follow suit in future, such as own house, education of children and their marriage, the first and foremost to start with is the investment on retirement. The reason is it should have the most corpus amount with it. A person who joins a job at the age of 28 needs one crore for retirement need, then it is enough to invest Rs 2,835 monthly at the rate of 12% per return per annum. If a person begins the plan at the age of 38 then the monthly investment should be Rs 10,000. If you delay the plan, you will have to invest more per month to achieve the corpus amount goal. 

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Income Beyond  Inflation 

Only if we are able to get income that is beyond the percentage of inflation,  we can fulfill the needs of life comfortably. Otherwise, we will be forced to a situation to borrow money. It is essential to invest in share markets and share market based mutual funds in order to gain more income to beat inflation.

It is also essential to have investment period more than 5 years with these kinds of investments. Then only we can gain more income beyond the ups and downs of the share markets. There is a formula to invest on share markets and share market based mutual funds. If you follow that the risk can be minimized. We should consider our age and  subtract it from 100 and keep that number as percentage on the available savings and invest that amount in share markets and share market based mutual funds. For example, if one’s age is 30, then 100 – 30 = 70, meaning one should invest 70% amount in share markets and share market based mutual funds.

Asset allocation

The biggest mistake that we commit is to invest on one particular asset type . For example, if one invests in gold, the person decides to invest the whole amount in hand on gold. Similarly if one wants to invest on real estate then the total amount is invested on plots, individual houses or flats.  This is wrong as it will be more risky. Hence we should distribute the money available in various assets such as Stocks, Fixed deposits, gold, eqyity mutual funds, debt mutual funds,real estate based on the age and our risk profile. It is better to consult a financial planner for investing. 

 

Essential to Invest Based on the Needs

It is enough to have a house to live. It is not prudent to have another house just for the sake of gaining tax exemption. It is important to keep in mind that with the present condition, only 2% of the total investment on house is gained as a rental income.

Types of Investments Based on the needs

 
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Next to consider is what type of investment should be made considering the types of one’s needs. Amount needed for short duration should be not be invested on shares and equity mutual funds. 

Similarly, one should not invest on debt funds, fixed deposits for retirement needs.

Tax Exemption

Though income tax exemption is intended towards need based investments, as far as possible, it is better not to have income tax for the principal  amount and the return  through investments. For long term investments, we can consider share market saving schemes like ELSS Fund, PPF and New pension system (NPS). 

Management of Investments

Whatever the investment, it is better to monitor its performance at least once in six months. If a particular investment is not performing continuously for two years it is better to transfer it to other profitable schemes, even though there is a little loss.

Protecting the Investments

With the long term investments, when the investment target is fast approaching, it is better to transfer those investments that are prone to more ups and downs to other safe investments. For example, let us suppose a person plans to invest on company shares and equity mutual funds for 20 years and operates accordingly.

A few years before the investment matures or immediately after the investment target is achieved, it is better to transfer it to other low risk schemes like Conservative balanced fund, debt funds and fixed deposits. If there is a fall in share markets unexpectedly, it is better to transfer the investments in order to protect the values coming down.

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Distributing Properties for the Heirs

Generally, the investment phase between 30 and 55 years of age is termed as Accumulation Phase where there is high investment. The period between 56 and 70 years of age  is termed as Preservation Phase. 

Above 70 years is the Distribution Phase where one distributes the investments to one’s heirs. It is essential to have the will written for the heirs as an act of distributing one’s properties.

Many families suffered because of not writing the will while the head of the family is alive and therefore after his demise, members of many families fight for the properties and even approach the court of law and in some cases properties were kept under hold not to be used by anyone of the family members. So it is highly essential to have the will legally written. Then only the members of a family will continue to live harmoniously and happily after the demise of the head of that family. 

If one continues to adhere to the above mentioned ten points seriously, one can live happily at any difficult circumstances without much hassle. It is important to earn money. But what is more important than that is to manage the earned money perfectly through well defined financial planning. 

(This article written by S Rajasekaran in Tamil for Naanayam Vikatan magazine dt 22/4/18 has been transcreated in English by V Amalan Stanley)

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