The Ultimate Financial Planning Guide

By | February 22, 2017

The Ultimate Financial Planning Guide

You’ve got 99 problems but money ain’t one of them?

Because you’ve stashed your cash safely away in a Savings Account, you’re covered, right? Sorry to break it to you, buddy, but you do, in fact, have a problem. To sum it up in one word – Inflation.

What’s inflation got to do with your money? Well, look at it this way. When you put your money into a Savings Account, you get interest at a rate that’s somewhere between 4%-6%. Not too shabby. But wait. What happens when you take inflation into account? Well, if you take inflation (which is currently close to 6%) into account, then at 4% interest, you’re losing money and at 6%, you’re just about breaking even!

If you never saw things that way before, don’t feel too bad – it happens to the best of us. But you know what? We’re going to give you a few tips to manage your money and, hopefully, see it grow. We’ll tell you all about the different investments out there and help you figure out which ones make the most sense for you (we’re nice like that). Before anything else though, there’s something you’ve got to do.

Additional Reading: Drama Lama Learns About Inflation

Assess yourself

So, before you jump into the deep end and start investing, you’ve first got to do an assessment of yourself. How’s that work? Well, it’s simple. Just ask yourself these questions.

  1. Do you have any debt?

Loans, Credit Card dues, borrowed money from Grandma that you never paid back? All that money you owe, it counts as debt.

  1. Do you have any dependents?

Parents, siblings, bawling babies crawling around. Those people you call family, you might want to make sure that they’re protected financially.

  1. How do you feel about risk?

You’re either the type that throws caution to the wind or, well, you’re risk-averse.

  1. Are you thinking ahead?

You’ve got plenty of plans like buying a house, getting a new car or travelling. But have you thought about marriage, children, and retirement?

Whatever your answers are to those questions, we’ve got something for you that we hope will make you the sharpest tool in the tool-box when it comes to money. We’re going to tell you the best way to plan your finances.

Let’s do this!

Down With Debt (managing your Loans and Credit Cards)

While debt isn’t a bad thing at all, proper management of debt is absolutely essential. So, the first thing you need to do is figure out what you owe. If you have Loans or Credit Cards, you need to identify which of these is costing you the most in the form of interest. The next thing you do is pay it off – duh! Allocate a fixed amount of money from your salary every month to pay off your dues. Remember, never only pay the minimum on your Credit Card. Always pay more and if possible, pay off the whole amount.

Additional Reading: Why Paying the Minimum Due on Credit Cards Is A Bad Idea

When it comes to your loans, remember that the longer the tenure, the more interest you will end up paying. You need to find the right balance between an EMI you can afford and still live comfortably; and the shortest loan tenure.

Loans are good. What?!

Did that get your attention? Thought it might. Depending on the type of loan you have, you could be eligible for some tax exemptions. Yes, we’re talking about Home Loans. A Home Loan can help you save a chunk of money through tax exemptions. So, if you have a Home Loan on your plate, calculate your taxable income and then figure out how much of a benefit you can get from your Home Loan. Want to know more?

Bonus Read: Home Loans = Tax Benefits

It’s A Family Affair (Health and Life Insurance)

So, you have dependents. Parents who are getting on in years, a spouse, and two lovely children. We’re sure you’d want them to be secure both while you are around and even if you aren’t around. That’s where insurance enters the scene. Health and Life Insurance play an important role when it comes to taking care of family.

Health Insurance

Let’s talk about Health Insurance and let’s talk about you.

Young and Single: If you’re young and feeling invincible, you might think that Health Insurance is not for you. Especially if you’re already covered by your company. Well, ill-health, accidents, and injuries can befall anyone and at any time. It never hurts to be prepared.  So, if you’re young, single, no kids and relatively healthy, you’re in luck because Health Insurance companies consider you to be a lower risk. This means that your Health Insurance premiums are going to be low. Pretty neat, right?

Just Married – thinking about kids: If you’ve just got married and plan on having children in the future, you should get a Health Insurance policy right away and specifically ask for a maternity cover option. The reason is that there is usually a waiting period before which you are entitled to make use of the cover. You can read more about it here: All About Maternity Cover

Married with Children? Here’s our advice to you when it comes to your Health Insurance. Opt for a Family Floater plan. This type of plan works on the assumption that all family members will not fall ill and not all at the same time, and that the medical expenses of members will not be the same for all. Under this type of policy, the medical costs of an unwell family member will be taken care of (up to the sum insured) and the rest of the family will then be entitled to any amount that is left over from the sum used. This way, all members of the family are covered and the members that don’t use the insurance support the ones that do. It’s much less expensive than getting an individual cover for each member. This plan generally covers the individual, spouse, and children.


Life Insurance

When should you think about Life Insurance? We’ll give it to you straight. You need to think about Life Insurance when the life of someone, who depends on you financially, will be affected by your death. Do you have a family that needs to be taken care of? If you answered yes to that, then Life Insurance is for you.

The All-important Question

What type of Life Insurance makes sense for you? These days, there are so many insurance products to choose from, you might find it difficult to decide. However, if you’re able to chalk out exactly what your needs are, then choosing the right policy will be a piece of cake. Let’s get munching.

Term Insurance: While there are several types of insurance, Term Life Insurance is the one that best achieves the objective of being insured in the first place. That is, ensuring the financial security of your dependants with no other agenda. With low premiums and a high Sum Assured, Term Insurance might just be the way to go if you’re an individual with a family that depends on you financially.

Additional Reading: Types of Term Life Insurance

ULIPS: But what if you’re single? No spouse and children depending on you financially. Is insurance not for you?  If you’re single and have someone like your parents, maybe, depending on you, then you certainly need insurance. This is where ULIPS make sense as you get both life cover as well as returns. Believe us when we say, there’s something for everyone. To know all about ULIPS and figure out if they make sense for you, check out this article: ULIP – Should You Consider Investing Or Not?

It’s All About The Money, Honey (Investments)

Now we’re talking. Now that debt and family have been taken care of, let’s talk investments. So, we already spoke about Savings Accounts and concluded that while it’s a step in the right direction, it’s not exactly the best way to go. There are plenty of other avenues you could consider. We’ll get to those in a minute but let’s get a few things clear first. Before you start investing, you need to determine your risk tolerance and chart out your goals.

Risk Appetite

Hungry to invest? What ends up on the table is entirely up to you, depending on your risk appetite, of course. To put it simply, how much money are you willing to risk losing? All of it? Some of it? None of it? That’s pretty much what your risk appetite is. How you build your investment portfolio will depend on this.  If your risk appetite is low, then we advise that you invest in safe avenues such as Fixed Deposits, Government securities and Debt Mutual Funds. While the returns are naturally lower (low risk = low returns), these investments are considered to be safe and you don’t really have to worry about losing money. If you have a higher risk appetite, then you would be more open to investing some of your funds in riskier vehicles such as equity-linked Mutual Funds and the stock market.

Additional Reading: Investment Options For Everyone

Your Goals

Your goals include events such as your marriage, birth of a child, your child’s education, your retirement, purchases such as a house, car, or travel. These are just some of the major ones but honestly, a goal could be absolutely anything. Before making any kind of investment, you should identify your goals. If you’re smart about it, you’ll be able to use your investments to fund these goals.

And finally, we’re going to talk about Investments!

Investments come in all shapes and sizes. You have investments for the short, medium and long term; investments that are risky; ones that are not so risky; investments that help you save tax; investments that help you save for retirement. We’ll tell you all about this and more.

When it comes to the investment part of your financial plan, you need to look at the short, medium and long term. The reason is that your goals are set for the short, medium and long term and your investments should align with your goals.

Short-term Investments: Any investment that is made for a period of less than five years is considered to be a short-term investment. Great for an Emergency Fund (which we’ll talk about shortly) and other short-term goals such as furnishing your house or buying a bike or a car. You know, things like that.  In the short-term you’re going to be looking at liquidity and while your returns aren’t going to be through the roof, neither is your risk. So, rest easy while you plan your short-term investments. Money market funds, short-term FDs and Savings Accounts are generally used in the short-term.

Additional Reading: Top 3 Short-term Investment Options For 2016

Medium-term Investments: Medium-term investments are generally considered to have a horizon of 5 -10 years. A medium-term goal could be something like planning for an overhaul or renovation of your house or apartment. Your pad’s perfectly fine now but is likely to need some fixing and a makeover a few years down the line. Do the smart thing and be prepared for any unavoidable expenses you might be faced with in the medium-term. Balanced Mutual Funds, are something you could consider for the medium term where returns tend to be higher and the risk, as the name indicates, is balanced out.

Additional Reading: Types of Mutual Funds

Long-term Investments: Long-term investments are those that are made for 10 years or more. Your child’s higher education or marriage, a year-long sabbatical or a world-tour for yourself, perhaps? (You’re important too). Your long-term goals could be anything. While it’s up to you to identify them and plan them, we can help you with advice on the investment end. Gold, Mutual Funds, Real estate, and the stock market are considered to be good long-term investments. This is mainly because historically, they have been known to beat inflation in the long-run. Like all investments, they come attached with a certain amount of risk but a good way to offset this risk is by averaging out your payments into your investments through systematic investment plans. Here are some of the Best Investments For The Next 10 Years

Additional Reading: Rupee Cost Averaging

Axe Those Taxes

Tax-saving Investments:

Section 80C, people. That’s what’s going to help you make a bit of money AND save tax. So, our Government has been so kind as to provide us salaried individuals with tax-exemptions, under Section 80C of the Income Tax Act, when we invest in the following vehicles – ELSS Funds, Life and Health Insurance Policies, NPS, PPF & VPF, Sukanya Samriddhi Scheme, Senior Citizens’ Schemes, 5-year tax-saving FDs, NSC and Pension Plans. Those are quite a lot of options. However, keep in mind that a maximum amount of Rs. 1,50,000 can be claimed in a financial year under this section.

Additional Reading: Tax-saving Investment Options Under Section 80C

A Fund To Help You Sleep Better At Night

Emergency fund:  An important part of your Financial Plan is your Emergency Fund. An Emergency Fund should be able to tide you over for at least six months of the year. An Emergency Fund is not to be confused with a ‘Fun Fund’, an ‘Impulse Shopping Fund’ or anything similar. If the name hasn’t already given it away, this fund is for emergencies.  If you were to lose your job, for example, trust us, you’d certainly be thankful for this fund, or if your car suddenly breaks down and needs a major repair but your Car Insurance doesn’t cover it, your emergency fund is going to be your friend, indeed. You should be able to access your Emergency Fund at short notice and that’s why investments such as Fixed Deposits and Liquid funds are recommended.

Additional Reading: How to build an Emergency Fund

The Golden Years


Thinking about retirement yet? Nah? You’re too young? It turns out that you’re supposed to start saving for retirement from the very first year that you start earning.  You can read all about it here – How Much Do I Need When I Retire?

Now, there are two parts to your retirement planning. Pre-retirement and post-retirement.

Pre-retirement: You can look at schemes such as NPS, EPF, and your long-term investments (Equities, ETFs and bonds). All these will help you ensure that you have enough funds to maintain your lifestyle even after you stop working.

Post-retirement: As you get older, the safety of your capital becomes more important than beating inflation. Wondering what the best ways to invest after retirement are? You should think about investments that will give you a regular income. Some options are Monthly Income Schemes (MIS), available at the post office; Senior Citizen Savings Scheme (SCSS), also available at the post office or any nationalised bank; and Pension plans, provided by insurance companies. It’s also important to have a certain amount of liquidity so remember to keep some of your money in Liquid Funds and FDs. A final option that retired people can think about is a reverse mortgage where your house in pledged to a bank in exchange for a regular income. The best part? This income is tax-free!

More About Your Investment Options: Good Investment Options For Retirement

And that, folks, is an overview of how you can manage your finances. So, now that you know where and how you should invest your funds, what are you waiting for? Get crackin’! The sooner you start investing, the better. And oh, don’t forget to pay Grandma back.

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Category: Financial Planning

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