Team CrawFin/ Harshal Jawale, CFPCM
Financial planning is about planning your money to achieve your goals within a given timeframe. Goals can be different for different people at different times, and you can't achieve these goals without financial planning.
The only problem is that many individuals do not take financial planning seriously and tend to act as they come. Once they know which fund or investment avenue to deposit their money into, they consider their financial planning is over. This indeed is a very big blunder. I wish financial planning was that simple by doing a few simple investments and your goals would be met. But the path towards our goal is never that easy, any goal for that matter. There are steps to follow which help you achieve your goals.
Let us have a look at the broad steps of financial planning.
1. Contingency planning
2. Insurance planning
3. Investment planning
4. Retirement planning
The first two steps: contingency planning and insurance planning is known as risk management. Once your risk is managed, you can then safely move on to the higher levels to plan for your goals. The next two levels are investment planning and retirement planning collectively known as goal planning.
Contingency planning
Emergencies can come anytime or anyplace, we cannot predict or at times even prevent it.
All your mandatory monthly expenses which you have to meet anyhow should be considered. They are all types of loan, premiums of various insurance, Grocery, Utility bills and other miscellaneous expenses. It is always better to calculate them for yearly basis to arrive at appropriate average.
At least three months of your average monthly expenses have to be kept aside in the form of emergency funds. Higher age or higher number of dependant then you should keep cover for more months.
It is equally important to keep emergency funds into liquid and risk free investment vehicles. One may consider a combination of cash, fixed deposit or liquid funds for the same.
Insurance planning
You may think that you are adequately insured but please note your insurance planning is not only planning for your life but also for health and property. I have seen many people buying ULIP at the age nearing to retirement, or agents approaching housewives to buy Life Insurance. They don’t even realise that they do not require life insurance anyways since their family members are not financially dependent on them.
Never buy insurance just because your agent advises you to buy. Try and understand the product, correlate it with your needs and requirements and only then go for it. It is very important to know that, Insurance is not investment. Insurance is for risk management and investments are for goal achievements.
So how much is adequate? A number of components go into the calculations in finding the adequate amount of life insurance. Age and Number of dependants form the most pie of consideration. Safely one can assume a cover of 10 years expenses or 4 years income whichever is higher is adequate cover enough. This ensures your dependant to have few years in hand to become independent.
In case of health insurance minimum amount of Rs 2 lakh is a must. For family floater cover should be increased appropriately. It is very important to pay your insurance premium on time and see that it does not lapse.
Especially for individuals who are nearing retirement must buy health insurance from outside. Today you are working and have health cover by company, but at 58 when you retire that cover will not be available; irony is this is the age when you need it the most. Most good health insurance policies allow entry till age 55. So it is very important to get yourself insured towards health before 55.
Your hard earned money has gone in setting up your house. If something were to happen to it then it is difficult to replace. So it is always advisable to have your property insured. The premium amount is low.
Investment planning
Save money and earn returns!
If the investments are not invested in right avenues then you would face either lock-in or low liquidity. Hence to achieve your goal it is not only important to grow your money but with appropriate risk level and withdrawal option.
One should be very clear about the goals and the time frame. Most important is goals should be realistic enough, neither too high nor too low. One may break down goals into 3 categories of –
Responsibility = Dependent Parents, Child’s Education/Marriage etc
Need = Buying a House, Saving for Retirement etc.
Dream = Buying a Car, Going on World Tour etc.
It is also critical to wrap it in timeframe. You cannot put aside equal amount of money for buying a house and saving for retirement at same timeframe. Buying house must be achieved much earlier and once achieved stretch must be given to retirement planning.
Then your investment products should be selected on the basis of the time frame within which you would like to achieve the goal. Once your goals and time frame is in place you need to be clear on amount that you would like to spend for that particular goal at today's value. After considering inflation, is the amount you will have to spend. Keep in mind that real inflation in case of our goal is much higher than total inflation declared by government every Thursday. It is safe to assume 8% inflation while calculating the amount required at any future date.
Future value = Present Value * (1 + inflation rate) ^ Number of years left to achieve your goals.
Retirement planning
Good news is because of medical advancement you are likely to live longer, bad news is you must make yourself independent for those extra non earning years. It should also be noted that unlike old times when families were living jointly, now is the era of nuclear family; hence one should not rely on children financially.
Inflation here too plays a spoilsport and increases cost day by day. Fortunately Government has been supportive by providing tax incentives for post retirement earning.
Retirement planning is not only about taking pension policy or contributing to PF account. Today when one jumps on better opportunities, it is also important to note that by job hoping you loses out with gratuity and superannuation.
While agents tell you that it is always better to start early for retirement planning, they forget to mention that retirement planning does not end at 58. In fact in my view retirement planning actually starts at age 58. When you have huge corpus accumulated over the life in hand and do not willing to take risks. It is difficult to deploy this huge amount without any risk and generate return at inflation pace. Remember investment should be safe enough because at this age you definitely not in a position to earn again if anything happen to it.
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