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Financial planning is not a one-time task, it’s more like a process. This process is best undertaken with the help of a qualified and skilled financial advisor. Whether you work with an advisor or decide to go direct, you must acknowledge that this process of financial planning is really about knowing the basics of what can help you secure your financial future, while at the same time taking care of your current needs and wants.
What we need to know is the composition of this basic outline, what must be included in your plan, without which it is incomplete. The outline can vary for individuals, but there are a few things that will always remain the same.
Within that, the contours of value and type of product will again vary depending on your need and unique financial situation.
However, these are things that have a universal application for individuals in securing their financial future.
Prioritise these three must-haves in your financial plan too.
Insurance is basically like a cushion in a bad fall. The cushion helps in minimising the harsh impact of the fall. What could be the potential fall in your financial plan? There are two situations which you must consider: the untimely death of an earning member of the family and second, unexpected medical expenses.
While the former can leave a permanent gap in the inflows of funds for the rest of the family members, the latter is something that can create a seriously large hole in your existing savings.
Unexpected medical expenses can arise from the treatment of critical illnesses like cancer or even from bodily damage caused in situations like car accidents. In both cases, the expenditure can far overshoot your estimate, leaving you with a bill that needs to be paid out of your long term savings or from borrowed money. I recall paying a Rs 12000 bill for blood tests and doctor’s fees, in a simple case of viral fever. Now imagine if it was something like cerebral malaria with the need for hospitalisation, the bill would get into lakhs of rupees.
A comprehensive health insurance policy can help you cushion these kind of large, unexpected medical expenses by paying a small proportion of the sum assured as annual premium. A Rs 50 lakh family floater health insurance policy, can come for roughly Rs 40-50 thousand a year. It cover two adults and two children in the family. A Rs 20 lakh Mediclaim for a 30-40 year old adult can cost roughly Rs 8,000-10,000 premium a year. The premiums are low and ultimately save you from breaking your savings to pay for unbearably high hospitalisation costs.
A term life insurance policy on the other hand is to firmly secure your family’s future. If any earning adult has dependent, especially young dependents like children or younger siblings, term life insurance is a must.
It protects the future of the family members dependent on the earning member in the event of an untimely death.
The sum assured, policy type, riders and add ons will all be subject to your unique needs. The first step is really to get the policy in place.
2. Emergency fund
As the name suggests, this is a fund for emergencies. What kind of emergencies? Any kind that may occur in your life. Emergencies don’t announce their arrival and can very well devastate your financial life. Job loss or redundancy is a common emergency that got hugely highlighted during the pandemic. For some of those who lost their jobs, work remains elusive a good two years from when the pandemic started.
You need to still survive through these years and what can help somewhat is having a fund with some monetary value to help you with basic needs through such difficult times.
Ideally, plan for 6-12 months of expenses being put aside in this emergency fund and invest the money in a safe and secure product like a bank fixed deposit or a liquid fund. In doing so, however, don’t forget to check the quality of the product, the issuing bank or asset management company. There is no replacement for quality.
3. Inflation beating long term assets
Once your financial cushion in the form of insurance and emergency fund is taken care of, you can now move on to long term inflation beating assets. Inflation refers to the annual price rise in the economy which keeps reducing the value of our money year by year. Unless your long term investment is beating inflation, you will continue to lose value on your money.
Assets that allow for gain in value like real estate and equity stocks are considered inflation-beating in the long run.
Real estate has thus far been the preferred choice for Indians to invest in for the future. However, it is becoming increasingly tough to select a good quality real estate investment from the 1000s on display and land has become very expensive too. Moreover, investing in real estate requires chunky money and comes with additional costs, low flexibility and low liquidity. This means you cannot sell or switch your investment too quickly if the need arises.
On the other hand, equity stocks offer a highly liquid, flexible and transparent way of investing at a cost. If you are unsure about being able to pick quality stocks, there are many fund managers whose job is to do just that. You then have to focus on choosing competent and consistent fund managers.
If you have figured out these three aspects of your financial plan, many other things can get put in place automatically. Don’t waste any time and get started. Recall what we said in the beginning, ideally, take the help of an advisor. With the advisor, you can sit and plan these nuances to suit your unique requirements and financial situation.