Basic Financial Planning

Planning one’s finance is as big a headache as planning to buy a house. First, it’s easy for one to put one’s financial planning to the back burner and easy to think about a house/property. Second, very few people really know what assets are and where one should invest. Most of their knowledge is (are) based on age old concepts. Here are few important things one needs to keep in mind while planning one’s finance.

1. Insurance

If foundation is the strength of a building, insurance is the foundation for financial planning. Insurance is further divided into two parts:

a) Life Insurance

b) Health Insurance

One should have life insurance cover that is 10 times their annual income. For this, avail the cheapest insurance plan from all insurance policies, term plan. For an insurance cover of 50 lacs (30yrs old), your annual premium would be in the range of 10,000.However, it is important that you consider the company that hasa better claim settlement history.

Health insurance is critical because of the rising cost of medical expenses. Gone are those days when treatment for an illness would cost you less than Rs.100. Today it ranges between 500-2000 for a normal treatment. The cost factor will further increase by the choice of hospital.

2. Emergency fund.

The thumb rule is one should have 6 months of their monthly salary as liquid emergency fund. Without this backup, one should not venture their investment into any other assets. This fund will help people manage a medical/unemployment crisis. Unexpected medical expenses, educational expenses and other important needs are taken care without harming the income. One important point: Buying an I-phone is not an emergency.

3. Tax Planning

Einstein is believed to have said “There are two things in the world that I don’t understand. They are death and taxes.

In today’s scenario, one does not have a choice to ignore tax. There is tax everywhere: Road tax, Income Tax, Education cess and lots more. With rise in income, your tax component increases. Planning taxes also helps one take care of investments. Tax saving instruments helps one save for their future.

4. Equity

Most people shy away from equity because they fear that equity is a risky investment. It is true only to an extent. If one is planning to invest in equity, the investment horizon should be not less than 5 years. Here the probability of negative returns is very less. Historically, equity has outperformed all other asset classes including gold.

In the above list I have not included Gold and Real estate. This will be a surprise as most Indians invest in these two asset classes. Gold is good to hedge against inflation but nothing more. Gold has emotional value and hence selling gold is out of question. Real estate is a topic for another day. Real Estate is the most difficult asset to liquidate. It requires high capital and investment period of 15 years for good returns; real estate should not be your ideal first choice of asset.

Hope the above suggestions make sense and do post your feedback with suggestions and ideas.

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