Serving the nation with dedication, discipline and duty is the cornerstone of armed forces personnel. In meeting the demands of service, personal financial management often gets overlooked. Frequent transfers and the everyday risks they face create unique challenges. Consequently, many personnel find it difficult to make informed, disciplined financial choices, jeopardising their long-term financial stability, say financial advisors. To overcome these hurdles, putting in place a well-thought-out financial plan is crucial.
Moneycontrol spoke to financial advisors and former armed forces personnel who have successfully transitioned to a career in finance after their service. Here are the essential elements of financial planning for defence personnel they outlined, keeping in mind the unique needs in question.
Maintain liquidity in your portfolio
It is essential to set aside a minimum of six months' worth of expenses, including equated monthly instalments (EMIs) towards loan repayments, apart from regular investments. Prableen Bajpai, founder of FinFix Research and Analytics, recommends, "Allocate this amount to a sweep-in fixed deposit or a liquid mutual fund, and top it up with a small amount each month to build a cushion for unexpected expenses."
Having experienced army life first-hand as a daughter and wife, Bajpai understands the challenges and hardships, particularly the difficulties that come with frequent transfers and relocations.
“The easily accessible funds can be used to cover high-cost expenses, such as renting a house while waiting for official quarters or paying for children's school admissions at new postings,” says Bajpai. Maintaining a liquid fund provides a financial safety net, allowing you to avoid dipping into long-term investments when unexpected expenses arise.
Involve your spouse in money matters
Frequent postings to remote locations often separate personnel from their families. To mitigate this, it's crucial to involve your spouse in financial decision-making. Consider opening a joint investment account that allows either partner to operate it, with survivorship benefits. This way, your spouse can make informed financial decisions on your behalf, in consultation with your financial advisor, even when you're not physically present.
“The spouse should not only understand the financial blueprint but also grasp the rationale behind each decision,” says Lt Col Rochak Bakshi (retd.), founder, True North Finance, a financial and investment planning firm based in Pune. This approach not only helps in the unfortunate absence of the breadwinner but also brings a fresh financial perspective from the partner, he adds. Bakshi served in the army for 22 years, then started his firm in 2022, when he was 43 years old.
Do not invest in multiple properties
Bakshi notes that the frequent transfers typical of armed forces careers often result in personnel owning multiple properties nationwide. However, this can become a financial burden given the difficulties involved with trying to sell these illiquid assets. To avoid this, Bakshi suggests investing in a single, ready-to-move-in property in a major city. This strategy provides a steady rental income stream and enhances financial security in retirement.
Major Ashish Chadha (retd.), CEO of Chadha Investment Consultant, advises against investing in property solely for rental income. "Rental income is taxable and often yields underwhelming returns," he notes. Chadha draws from his own experience, having served 11 years in the army before founding his investment consulting firm at the age of 31 in 1995.
Also read | 9 personal finance commandments that those in armed forces must follow
Avoid sub-par insurance products
Steer clear of traditional insurance policies that offer low maturity returns, as well as insurance-cum-investment products that come with hefty charges, including high mortality and premium allocation fees. These products often provide inadequate insurance coverage, typically limited to 10 times the annual premium. For example, a Rs 50,000 annual premium may only provide a cover of Rs 5 lakh, making them a less-than-ideal investment choice.
Bajpai points out, "Army personnel are already covered under the AGIF (Army Group Insurance Fund), which provides them with a substantial insurance cover." The coverage amount varies by rank, ranging from Rs 50 lakh to Rs 75 lakh.
Bakshi suggests, "Those opting for premature retirement from the armed forces should consider purchasing a term insurance policy to ensure they have sufficient coverage in place."
According to Chadha, ex-defence personnel and their families can rely on the Ex-Servicemen Contributory Health Scheme (ECHS) for health-related expenses, making separate health insurance unnecessary. However, children lose ECHS coverage at 25 years of age, so having a separate insurance policy for them at that age is recommended.
Also read | Why army veterans are becoming a prime target for financial frauds
Diversify your investments
Similar to salaried civilians contributing to the Employees' Provident Fund Organisation (EPFO), armed forces personnel contribute a portion of their monthly salary to the Defence Services Officers Provident Fund (DSOP).
Bajpai advises, "Maximise your DSOP contributions by setting aside a substantial amount each month and increasing it over your service tenure. As DSOP subscriptions are eligible for tax deductions under Section 80C, you can avoid investing in separate tax-saving instruments."
The DSOP currently offers a 7.1 percent annual return, which may not keep pace with inflation, currently around 5 percent. This highlights the importance of diversifying your investments beyond DSOP, especially for long-term goals like funding your child's higher education or securing a comfortable retirement. Consider creating a portfolio of equity mutual funds to achieve these objectives.
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