Financial shots at no cost
By Umesh Rathi, CFPcm, ARIHANT capital markets
It is so unfortunate that though we spend half of our lives working long hours to make our ends meet, yet we are barely able to take out time to manage our personal finances. The need of the hour is to not only earn, but also allocate our time in managing our money and creating a sweeping change in our mindset.
1. Improve your financial knowledge: We had studied various subjects like mathematics and science at school, but we were never taught about personal finance. PERSONAL FINANCE is a subject you ought to have knowledge of, wherever you go in life. Hence, improving financial knowledge is the first step towards financial well- being.
2. Create an emergency fund: Life is full of uncertainties and it is often difficult to incorporate such uncertainties in our financial plan. Emergency fund not only helps in fulfilling the financial needs during uncertainties but also secures us from mental disturbances which may arise due to financial crisis. Our emergency fund should be equal to an amount of our monthly expenses plus our loan EMI of 4-6 months and yearly insurance premium.
3. Reduce your loan burden: We should review our existing loans and ensure that all loans help us in increasing our net worth (assets- liabilities). In case they do not, we should plan for repaying the same. We should also find out ways to reduce our interest burdens.
4. Take adequate insurance cover: Insurance is probably the most critical, and yet the least seriously dealt with aspect of financial planning by most people. Though most of us take life insurance or health insurance covers, but the amount of cover is usually not adequate. While buying life insurance, you need to consider the immediate, future and living expenses that your family might have to incur in case a tragedy strikes you.
You should not mix insurance and investment. Hence, the right strategy is to buy pure term insurance with adequate cover. Looking at the increasing medical costs, one should also plan to take health insurance for each member of the family.
5. Prepare saving plan for each goal: Set goals and plan their achievement levels, especially when it comes to the financial ones. Financial goals can be of three types: short, medium and long - term. A short-term goal could be anything like say purchasing a car, a medium – term goal may include planning your child's education and a long - term goal could be your retirement planning. Whatever be the financial requirement, it can be fulfilled by determining its urgency and thereby making a saving plan for each goal.
6. Invest as per your risk appetite: We should understand that risk and return are the two sides of the same coin and an investment with a higher return indeed bears a higher risk. Therefore, we should plan our investments as per our risk appetites. We should also ensure that the post tax returns on our investments are able to beat inflation and additionally, have sufficient liquidity.
7. Tax planning in conjunction with Financial Planning: For most of us, tax planning is an end-of-the year, last minute exercise. Tax planning should actually be done keeping in mind our needs, life goals and risk appetite in conjunction with the overall financial planning.
8. Budgeting: To gain control over your finances, you need to know how much you are earning and where you are spending. Budgeting will help you to identify high expense area and realise that a good amount of your income is being wasted there. This knowledge can be very helpful in saving money.
9. Write your WILL: In the normal course, we plan to write our WILL after 60-70 years of age. But unfortunately, most people die without writing their WILL and hence we see several family feuds around us. Therefore a person who is major, having sound mind and assets/life insurance policy should write WILL.
10. Share your financial affairs with at least one trusted person: We often read in newspapers about billions of unclaimed money being stashed in bank accounts. The underlying cause for this is that no other member in the family of the deceased person is aware about the finances left behind, and hence the money cannot be used by the surviving family members. Therefore, one should share all the financial matters with at least one trusted person.
11. Take advice from the right experts: In India, the financial service providers often focus on providing commission based recommendations. They are not bothered about providing knowledge to their customers to help them manage their money for financial well being. Hence, we need financial experts who can give solutions considering one’s over all needs, attitude, life style, risk tolerance and financial situation. Transparency and honesty are the main aspects you must consider while selecting a financial planner for yourself.
While we often seek expert professional advice in every field, such as consulting a doctor for our health, an architect for constructing our home, a CA for managing our taxes, or a lawyer for handling our legal matters, then why do we not consider taking the advice of a Certified Financial Planner cm for our Financial Planning?
The author of this article can be reached at email@example.com