If you have the means to comfortably retire today, well done, this may not be for you. For the other mortals who have some time to go before that happens, read on, there may be some tips that you may find useful.
There are 2 ways to plan for your finances
1 - Bad things happen to other people.
2 - Expect the best but prepare for the worst.
This is for those in camp 2. For those in camp 1 – my best wishes!!
Term Life Insurance is absolutely necessary –
The insurance value should cover your current/ near future loans +5 or 10 years of loss of income. For those of us who live in a metropolis and had the courage to buy a home on loan, this may mean a life cover of 5 cr or more. Good thing is you can discontinue the coverage once the loans have been paid off and one has a retirement egg. It is best not to mix investment and insurance, so plans that mix the both can generally be avoided. Add ons of critical illness and permanent disability should also be taken. Think of it as planning for the untimely in a timely way. The earlier you start the better.
Medical Insurance is absolutely necessary too –
The insurance from your employer does not qualify, sorry. While it is good to have esp if you have co-morbid parents, it may not be available when you need it the most since your company may have different thoughts in the next crisis. So take medical insurance independent of your employer. Amount is also important – 25/50 lcs or higher. While I hope none of us will need to use it, it is an absolute must have. Earlier the better.
Have liquidity in hand –
3/6 month expenses should be readily available. One can substitute this with credit card limits as well. Be mindful that banks can also unilaterally reduce your limits when you need them the most.
Savings and investments –
Step 1 is savings. This should be a % of your total income and not some fixed absolute amount. Higher the better. Anything below 20% of your post EMI income is insufficient. Only home loan EMI’s count – depreciating assets and EMI’s for holidays etc don’t. Consistency is critical.
Step 2 is investing that saving. Take advise from someone you can trust, educate yourself and invest what you can understand and are comfortable with. Don’t get too comfortable though – it comes in the way of growth. Equities are absolutely essential if you want to save for retirement and have 20 years or more to get there. Earlier the better here too.
Risk Management –
Don’t try to get rich quickly. It’s a trap.
If it’s too good to be true, it generally isn’t.
Always think about the motive of your counter party. If it is clear, then good. It will help you make better decisions.
Verify the background of the advisor and speak with some of their clients before taking and implementing advise.
Keep a margin of error. Larger the better.
Concentration creates wealth. Diversification protects wealth.
There are many ways to get rich. There are only few ways to lose it – greed, leverage, ignoring risks, copying others without understanding what they are doing and (generally) bad financial decisions.
Involve your partner –
Keep your partner updated on financial matters. At least once a year, make a balance sheet to list all assets and liabilities with details of bank accounts/fund statements/policy nos. If you owe someone some money or vice versa, your partner should know. Keep your policy documents and statements of investments secured and let your partner know. Create nominees and have joint accounts.
Keep your advisors close –
Advisors are very important – for your major life, career and financial decisions. Once you find people who really care about you, keep them close. People will make mistakes and not all decisions will turn out well, that is part of life. As long as it is not life threatening and an act of commission, it is ok. They will be around to hand hold your family in your absence.
Give back –
It may be time, your attention, your money, a good advise or just a shoulder to cry on – pay it forward.
Invest in yourself –
Some of us are uncomfortable to manage money. It is important skill to work on it and can be acquired, just like you may work on your fear of water and inability to swim or your public speaking skills. As we upgrade our lifestyles as we progress through our careers, we need to upgrade ourselves too. Also take good care of your health, it is the best investment you would possibly make.
Your financial plan is as unique as your DNA so there are no rules that apply to all. A principles based approach works best – understand the rules and apply the same to your situation. Why start with financial advise and end with advise on life? Because better finances lead to better lives, not vice versa. Please take good care and stay safe.