Once I was with my client at a coffee shop in the 5-star hotel. I was asked about my coffee choice. Out of the multiple options , I was not sure what to order so I left it to the client. I thought when we had only two options of coffee i.e. filter coffee, and Nescafe life was easier. With the arrival of Starbucks and CCDs, even a simple decision of coffee become complicated.
It’s no fun knowing a simple thing. The real sense of pride comes when we decode the complex thing. That’s why finance professionals have made the subject of personal finance a complicated one.
Multiple websites, multiple products, and multiple advisors have made personal finance a very complicated subject. People get confused for no reason. The basic and ultimate rule of personal finance is using common sense.
Here is a short post to make you confident to deal with your personal affiance.
To manage risk family income in the event of the death of the earning member. This would safeguard the dependent family members.
Go for the term plan. Ideally, the interest on the maturity amount should cover the family monthly expenses. This is subjective as the year of death is uncertain so you never know when the policy amount will trigger.
You can target double the existing monthly income. Consider a safe investment interest rate of 7%. So in case, your monthly expense is Rs. 50000/-, target to earn Rs.1,00,000 per month at 7% interest rate. The policy amount of Rs. 1.75 crs would give you an income of Rs. 1 Lakh per month.
1,75,00,00,000/- x 7% = 12,25,000/- per annum. i.e. appx Rs. 1,00,000 per month. The income tax effect is not given. You can work out what is suitable and applicable to you.
Term plans are cheaper, go for it as early as possible in life. That will further reduce the premium. If you can’t invest in the whole amount of policy at one go, don’t worry. You can aim for the final figure and achieve it as your income increases.
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This is important with rising medical costs. Have a health insurance plan for the family members. Start small, but aim to reach an amount of Rs. 15 to 20 lakhs for all the members. If budget is the constraint, keep the higher amount policy for the seniors.
You get a lower premium if you invest early in life.
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Investments in low-risk instruments like bank FDs, debt mutual funds, Govt saving schemes are necessary for life stage planning. For children’s higher education, wedding, your retirement, and home buying, safe investment is desirable.
In such instruments, you will get a lower return but you are minimising the risk.
Invest in equity-linked investments like equity shares, equity-linked mutual funds to build wealth. Here you are incurring higher risk but return potential is also high. If you don’t understand the equity market invest in mutual funds or direct equity of blue-chip companies. This asset class when invested for a long-term build wealth.
“Not money, not skills, but Time is the biggest lever for massive wealth creation.” Manoj Arora, The Autobiography Of A Stock
There is no thumb rule for a percentage of risk-free investment and risky but wealth-building investment. Make your own assessment and judgment.
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Loans / Credit card
Loans are easily available for everything but exercise caution. Loans are dangerous and excess loans could derail all your financial planning. Use credit card judiciously because when you fail to pay on time, it is the costliest credit you are availing.
“Debt is a dream killer.” Kerry Hannon.
“Do not save what is left after spending, but spend what is left after saving.” Warren Buffett
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You may avail of a loan for a home because the asset you are buying is appreciating. You buy a car, your car value depreciates as the years go by. Your house value appreciates mostly with time.
Another key aspect of personal finance is to spend wisely, negotiate always, avoid temptation, keep a record of all your investments and share it with your spouse. That’s it.
Personal finance management is more of discipline and common sense. Do not get confused with several products available in the market and tons of advice you hear and read everywhere.
Manage risk (Life and health insurance), plan for the future (invest in safe and wealth-building assets) and avoid blunders of borrowing recklessly. Keep a record and let the family members know it. Period.
“A formal education will make you a living; self-education will make you a fortune.” Jim Rohn
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