A dedicated and focused one can definitely achieve the Financial Planning.
But in practice, not everyone can do it. It is bit difficult. Because we have to compromise on lot of things. Most of the people will not be able to save aggressively and invest like that. My request is, even if you are not able to save aggressively and invest to build wealth, at least do the basic financial planning. When it comes to financial planning, certain things are optional. We can either do it or can skip it. But certain things are not optional at all. Everyone should do it. What are all those things and why it is important to do it? Lets dive into it. Hello.
The first thing to do in financial planning Is ?
buying life insurance. I am seeing many folks. They will be the sole breadwinner for the family. The whole family is dependent on their income. And yet, they would not have bought the life insurance yet – saying that can be done later. They have no idea how much risk they are taking in their life. Up until a tragedy strikes, we will not realise the seriousness of it. Few years ago, a family of dad, mom and a 6 year old son was living in the same apartment complex as mine. The dad was just fine, but one day fell unconscious while shopping in walmart. But he passed away on the way to the hospital in the ambulance. His family was in total shock. Bigger shock is that he did not have any life insurance.
Its just not the emotional stress of his loss for his family, now they have to face the financial stress for the rest of their life. We are seeing many incidents like this. When something like this happens in US, friends create a donation page for gofundme. But how long can a family manage their with funds like that? That is why, do not see life insurance as optional. It is a must. If loss of a family member will bring financial stress to the family, that member should definitely have a life insurance. When it comes to life insurance, we should not be buying useless products like universal plan, endowment plan and ULIPs. We should be buying simple and straight forward Term Insurance. It is very cheap too.
We should be buying Term insurance for a premium of at least 25 times our annual expenses. Do not skip buying life insurance thinking that you are already covered in your office for one year salary. That is not enough. So when it comes to financial planning, regardless of whether you are doing other things or not, definitely buy life insurance. Next thing to handle is “Debt”. While debt would slow down the growth for some, but would totally destroy others. We have already see this in our “Good Debt vs Bad Debt” episode. If you want to learn how to handle a debt, definitely watch it.
We will not be able to do any financial planning when we have “bad” debts. So if you have a bad debt, pause the video right here. You need to look into options to pay off that debt first before looking into other financial planning steps. It is not smart to invest for 8% return when we have a debt that sucks up 10% interest. If you have bought a life insurance, paid off bad debts, then the next step is to save for emergency fund. We already saw this in financial freedom video. Our life never goes per our expectation. Always throws in few surprises and shocks here and there.
The emergency fund prepares us to handle that.
At least have 6 months of expenses as emergency funds. Many think that they can manage all emergencies with their credit card. Bad idea. All the hard word that we did in step 2 to get rid of the monkey “debt” will go waste. That debt monkey will be on our back again if we use the credit card for emergency. We should never let that monkey close to us. We should always keep it far. 6 months emergency fund is very important for that. Have the emergency funds in an easily accessible liquid account. If you have bought life insurance, no bad debts and also have an emergency fund, you can pat yourself on your back. Just doing these three will put you ahead of 90% of people in financial planning. After these, we have to invest for two important goals. 1. Retirement. 2. Kids education.
If we ask about retirement planning to our folks, what would they say? A very cool response like, “Retirement? We got long way to go. We will worry about it later.“ Only when they reach 40, it will hit them that half their life is gone and still nothing planned for retirement. So do not take retirement planning lightly. Inflation rate in India is at an average 5%. That means, if our monthly expense is Rs. 50,000, then in 10 years, it will become Rs.82,000 to maintain the same life style. In 20 years, the same need will become as Rs. 1,33,000. If we need Rs. 1,33,000 after retirement
how much to save Today and where to invest it.
If you are not willing to take any risk and would like to only have the money in Fixed Deposit, then there is no way you will be getting to your retirement goal. We will be dependent on our kids for support after retirement. If you think that you cannot be a dependent like that, then you need to learn to take calculated risk. The assets that we are investing in, should grow beating the inflation. We have already covered the risks and return potential of different assets in “Asset Allocation” video. If you have no watched it yet, please watch that first. To have enough money on retirement, we should definitely have stocks exposure. General rule for retirement is, invest our age % in other assets and (100 – our age) % in stocks (equity). That is, if I am 40, I should have 60% of my portfolio in stocks and 40% in other assets. Adjust that % depending on your comfort.
To add stocks exposure to our portfolio, I have already recommended few mutual funds in “Stocks Portfolio Recommendation” episode. It is not that difficult. Very simple. Just open an account in a mutual fund house and invest in direct index fund. That is all. After retirement goal, next in our priority list is savings for kids education. We should remember one thing. We can always get a long for education. But for our retirement, we are on our own. That is why, saving for retirement is higher priority over saving for kids education. It is easy to say that. But in practice, it is difficult for us to be like that as a parent. We are all emotional slaves. We try to at least support for kids undergrad education.
why we need to save for the separate goal.
25 years ago, when I was doing my undergrad in Anna University, we paid Rs.6,000 per semester. Now it is Rs.55,000 per year. or Rs. 27,000 per semester. It has gone up 4 times in 25 years. We can expect this to rise in the same speed in the future as well. In next 25 years, this Rs.27,000 could have gone over Rs. 1,00,000. This is for Govt. college merit seat. Given the competitive environment Today, we have to be prepared for management seat. So to calculate how much we need for kids education, find out the cost Today. Assume that it is going to rise 8% every year and do the calculation for your needs. I will cover this topic more in detail in future. All these are basic things in Financial Planning.
Everyone should have thought about it. Planned for it as well. Other than these, buying health insurance, writing will etc are there as well. But it is basics’ next stage. We will cover those some other time. If you are following this channel, you are already in 0.1% of folks who like to improve your financial knowledge. The rest of 99.9% will be clueless when it comes to financial planning. Please share this video with them. This will be a wake up call for them. If you think that this basic financial planning itself is complicated, then you definitely need a financial planner’s help.
Don’t go to your bank’s regional manager or financial advisor for that. They will hit their sales target by selling products that you do not need. To be fair, it is not their mistake. They are doing their job. There are many fee only financial planners in the market. They do not earn any commission by making us buy any product. Their only intention is to help with client’s goal. That is why they are charging a fee to help us with that.