How to do Financial Planning?

DO’S

• Save at least 20% salary
• Always have a 6 months expenses buffer
• Have documentation of everything including investments, insurance and liabilities. 

DON’T’S

• Avoid illiquid investments like buying a home when you are not likely to have enough cash in hand in near future.
• Unless extremely necessary loans after retirement should be avoided

HOW TO MANAGE EXPENSES ?

• For Small unexpected expenses use the surplus money you already have
• For large unexpected expenses take insurance
• For Expected expenses which are large in nature ,Use your investments

• For unexpected large expenses which are uninsurable ,take personal loan or take loan against securities

Suppose a person is of age 25 years ,and is going to retire at the age of 60. His expected longevity is 90 years. And, required corpus post retirement is 6.5 Crores. What Investments must he make to ensure that he accumulates the required corpus post his retirement needs – Scenario Analysis:

1. FD – Poor rate of interest and return is always less than inflation. Average return is around 8%
2. Equity – better rate of returns. Return = GDP growth % + inflation %. Average return is around 12-14%.
3. To reduce risk – Go for long term investment. Short term investments are risky
4. Start with Large cap diversified equity Mutual Fund
5. Gold – Moves inversely to equity markets. Terrific investment option. Gold stocks, no emotions attached, return 9%
6. Real estate – first house cannot be an investment. Top richest people haven’t become so through real estate. Can offer monthly returns. Best CAGR on Real Estate investment in india is 6% + rent 2%

HOW SHOULD SOMEONE DECIDE THEIR INVESTMENTS? Investments are based on a person’s financial goals :

• For long term take more risk which in turn gives more return. Equity is the preferred choice.
• Medium term
• Short term – take less risk. Preferred choice is Fixed Deposit.

Goals are divided into :

How to manage Insurances ? 1 . Keep emergency buffer amount of 6 months 2 . Have personal accidental insurance – covers temporary and permanent disability

3. Medical insurance – if taken at a later on in life, won’t cover pre-existing diseases. Premium is less even if taken for whole family. 50,000 Rs is the maximum deduction allowed under section 80D of Income Tax.
4. Life insurance – Don’t go for life insurance if you aren’t married or don’t have dependents. Sum insured should be at least 15 times of your salary.