Financial Planning Myths Debunked

                                                     

Financial planning is the road map to a destination called financial freedom; a term generally used to describe the state of having sufficient personal wealth to live indefinitely without having to work for basic necessities. Financial planning is the process of meeting your life goals through the proper   management of your finances. Life goals can include buying a house, saving for your child's higher education or planning for retirement. It provides direction and meaning to your financial decisions.

Financial planning allows you to understand how each financial decision you make affects other areas of your finances. By viewing each financial decision as part of the whole, you can consider its short and long-term effects on your life goals. With proper financial planning not only one feels secured but one can also adopt comfortably to the life changes as your other goals are on the track. There are, however certain myths associated with the financial planning.

1.       Financial planning is only for the wealthy and oldies.

No it’s not. In fact it’s meant for anybody having aspirations of a happy family with children given best education, comfortable life style and enjoyable retirement. Start planning as early as possible. Don't delay your Financial Planning. People, who save or invest small amounts of money early, and often, tend to do better than those who wait until later in life.

2.       Wait until a money crisis to begin Financial Planning.

How often have you thought of saving from next month? Then along comes next month an unexpected expense like a vacation, a mobile phone or some household appliance that you simply must spend on. A story that could repeat itself month after month.  By developing good Financial Planning habits such as saving, budgeting, investing and regularly reviewing your finances early in life, you will be better prepared to meet life changes and handle emergencies.

3.       Expecting unrealistic returns on investments.

There is no magic in financial planning. Financial Planning is a disciplined approach to manage your finances to reach life goals. It cannot change your situation overnight;    it is a lifelong process. Remember there are events beyond your control such as inflation or changes in the stock market or interest rates.

4.       Don't set measurable goals.

Set specific targets of what you want to achieve and when you want to achieve results. For example, instead of saying you want to be 'comfortable' when you retire or that you want your children to attend 'good' schools, you need to quantify what 'comfortable' and 'good' mean so that you'll know when you've reached your goals.

5.       Neglect to re-evaluate Financial Plan periodically.

Financial planning is a dynamic process. Your financial goals may change over the years due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisit and revise your Financial Plan as time goes by to reflect these changes so that you stay on track with your long-term goals.

6.       Make a financial decision without understanding it’s affect on other financial issues.

Remember that all of your financial decisions are interrelated. Each financial decision you make can affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. Or a decision about your child's education may affect when and how you meet your retirement goals.

All through your life several significant events buying a new car, moving to a bigger house, children’s education & marriage etc will occur at various stages. A little bit of planning and investing would make your life a lot easier. More on planning your finances later... Till then Stay Blessed!!

Volatile Markets! What to do!

                                 

A friend of mine called up quite late last night. She was extremely worried. L&T has come down to 1070 she said. So? Is that the reason you woke me up, I asked? I’ve lost money she said. She is not the only one who is concerned. Many have lost sleep thanks to the uncertainty in the markets.

The stock markets have been volatile since the last few months mainly due to the uncertainty in the developed markets, especially in the Euro region. Investors are concerned about the sustainability of the current economic growth rate in the domestic market as well.

Short-term investors

Usually, short-term investors look for opportunities to invest surplus liquidity in some instruments that are easy and quick to liquidate. Since the market direction is quite uncertain, it is not advisable for short-term investors to invest in equity or equity-based instruments. Short-term investors should invest in debt-based instruments such as bank deposits, liquid mutual funds, debt based mutual funds etc.

Medium-term investors

The investment horizon of medium-term investors is typically three months to a year, with the objective of making some quick money without having too much lock-in. Going by the uncertainty in the global development markets, it is not advisable for medium term investors to invest aggressively in equity. These investors can invest in diversified instruments (debt as well as equity-based). Medium-term investors should be very cautious and invest in large-cap companies. They should also follow a disciplined approach to entry and exit from positions as they do not get the benefit of many rallies or correction phases due to their short investment tenures.

Long-term investors

Long-term investors look at building their investments slowly and steadily over a long term. Usually, the investment horizon of long term investors is a couple of years or more. Analysts advise long-term investors to invest in diversified assets and have a mix of instruments such as equity, debt, commodity and property in their investment portfolio.
Currently, the equity markets are going through an uncertain phase and therefore it is advisable to avoid too many investments in equity-based instruments and park funds in other diversified instruments.

Some experts do recommend selling during a rally to book profits or exit from loss-making or under-performing stock if the markets rally and hold cash till the sentiment improves. But it would depend on whether the person is a trader or investor because both would have different reasons to do so.

As far as an investor is concerned it’s wise to stay invested and ‘don’t panic’ should be the mantra on Dalal Street. On September 26, 2007 the sensex had gone over 17000 mark for the first time. Over the next seven months it crossed several milestones to top 21000 in January 2008. But within the next 10 months it had lost nearly two-third of its value to a low of 7700 in October 2008.

 The yo-yo came back to 17000 again in October 2009 and investors’ wealth was 6 lakh crores more than what it was when the sensex had crossed 17000 mark earlier. Those who didn’t panic, made money. 20 out of 30 sensex stocks were at higher level than they were in September 2007. Agreed that the market has been volatile and there have been serious ups and down in these 2 years yet keeping faith in the long term power of Dalal Street has its own rewards. Happy investing. Stay Blessed.

How much Insurance do you need?

Met a gentleman recently who very proudly shared with me that he pays Rs 90000/- per annum as the premium towards his 10-12 insurance policies which he has accumulated over the years. I talked to him for about 10 minutes and learnt that his 10-12 insurance policies provide him a cover of approximately Rs 15 lacs. Is it a sufficient amount I asked? He said 15 lac kam hain kya? More over I save tax. Is it not an important reason to buy insurance?

He was not the first such guy I had come across. The average life insurance cover of policies sold in 2010-11 was Rs 1.93 lakh I recently read some where. By that logic his 15 lacs insurance cover is pretty decent, however not sufficient by any standards. Buying life insurance is a national pastime in India. After bank deposits, it is the most favored destination for household savings, accounting for almost 25% of the wealth of small investors. Yet, most of us have no clue how much insurance we need. And what kind of insurance one should buy.

 Let’s take the example of this gentleman. If some day he doesn’t reach home, his family gets Rs 15 lacs from the insurance company. Rs 15 lacs invested in a bank FD at 8% would give an annual return of 1.20 lacs. Is this amount sufficient to sustain the same standard of living assuming prices do not go up?

The table below explains the calculation of human life value for Mr A and gives a fairly good idea how much protection cover is required, if he doesn’t get up one morning from his sleep.

Annual income Rs. 4,00,000 per annum.

Taxes & personal expenses Rs. 8,000 per month

Net monthly contribution to family Rs. 25,000 per month

Net annual contribution to family Rs. 3,00,000 per annum

Bank FD rate 8%

Human life value calculation 3,00,000 / 8%

= 3,00,000 / 0.08

= 37,50,000

Insurance amount required (HLV) Rs. 37,50,000

Rs 37,50,000 invested in Bank FD at 8% interest rate will give annual return of 37,50,000 × 0.08 = Rs. 3 lakhs per

annum.

This method will ensure that the family will continue to receive Rs. 3 lakhs per annum as long as Bank

FD rates stay at 8%. This method assumes that the annual salary will remain constant at Rs. 4,00,000

throughout, and does not take into consideration any expected increases in salary. It also assumes that

Bank FD rates will remain constant at 8% throughout, and does not take into consideration the increase or

decrease in interest rates.

Some financial experts feel that protection amount must be at least ten times  the average annual income.

As age increases human life value diminishes. Hence an appropriate way would be keeping the age of the insured in mind.

Age                   Amount of Insurance

21-40 Yrs           20 times the average annual income

41-50 Yrs           15 times the average annual income

51-60 Yrs           10 times the average annual income

61 and above        5 times the average annual income

Human life value is not a one-time calculation. It is an ongoing process which needs to be revisited from time to time. Stay Insured. Stay Blessed.

In the land of Annapurnas and Laxmies

My grand mother was an amazing story teller. She had an endless treasure from Panchtantra to Fairytales and from Aesop fables to Mythology. However, all these stories had one thing in common. Men went out to work and earned money. Women stayed at home, cooked food and managed the household. Traditionally women have been the finance managers- they got a fixed sum of money to manage the house. The men would manage the saving and investing part. This was a trend ages ago and has not changed even today.

Times have changed and so have the lifestyles. Joint families are disappearing and there are more nuclear families. Higher borrowings and greater aspirations have compelled women to step out of their secured cocoon and they are not only earning incomes but corporate boardrooms are also seeing more female participation. So far so good. Women are perhaps not yet as involved in household finances. While women may have become more active in ‘earning’ incomes, ‘managing and investing’ aspect is still a man’s area of expertise and women voluntarily take a back seat. Definitely women are great at managing household expenses. But today, they cannot and should not stop just at that especially when there is a huge variety in investment opportunities and access to all kinds of information was never easier than today.

They say journey of thousand miles begins with a small step. The time has come for the women to take these small steps towards financial awareness. A woman must know the details of health insurance, life insurance, FDs, details of mutual fund investments, loans and EMIs that are being paid. All that needed is the will. Women have traditionally been the ‘home managers,’ there maybe resistance to step into the seemingly complicated, jargon filled world of larger finances. But that is not something that cannot be overcome.

So ladies shed all the inhibitions and get active in money management. You aren’t called “Annapurna and ghar ki laxmi” just like that.  Educate yourselves and then there is no looking back.

 And a sincere advise to the gentlemen—

Do not take all decisions all by yourself, involve your better halves as well. Your household's investment portfolio will be less risky and more diversified as women put safety first; whether it’s driving with the seat belt on or investing and tend to be more risk averse hence you will be wealthier in the long run. Happy investing. Stay Blessed.