Managing Your Personal Finance

Why your personal finance is out of your control and how to bring it under your control?

“I was a safe investor. So I invested everything in fixed deposits. My returns are not even beating inflation. So to beat inflation, I invested in stock market. But now the markets are crashing…”

“I kept a sizable emergency reserve in liquid funds; I didn’t have any emergency situation for 3 years. The liquid fund where I kept the sizable emergency fund was not giving me good returns. So I invested that money in a small property. Now I have an emergency and the property is not easily liquidable…”

“ When I see return on my investment portfolio, at times, I feel that I’m not getting good returns and start investing in aggressive investments.  Then, I feel that I’m taking too much risk…”

Does any of the above sound similar to you?

Why managing your personal finance is out of your control?

Why are you in a dilemma always?

Why you are not able to take any confident investment decisions?

When things go out of your control, you feel less confident and you are in a dilemma.

Lesson 1: You have control over your personal finance and investment decisions. But you don’t have control over the consequences of your personal finance and investment decisions.

Lesson 2: Timeless personal finance and investment principles have control over the consequences.

I discovered the above 2 lessons after studying and reviewing hundreds of investment portfolio.

Putting lessons on the perspective:

Let us put the above lessons in a proper perspective.

You have control over your investment decision:

You can choose to invest in Fixed Deposit or Equity Mutual Fund. You have complete control over this choice.

You don’t have control over the consequences:

Fixed deposits beating inflation or markets being stable are not under your control. The consequences are not under your control.

Timeless Investment Principles control the consequences:

Following are the few principles which control the consequences in our example;

a)      A safe investment will not deliver higher returns.

b)      High return investments will be volatile.

Investment principles like these are timeless. They produce both personal peace and dramatic investment results.

How to bring personal finance and investments under your control?

By now you could have guessed. If you take your personal finance and investment decisions based on the timeless investment principles, the consequences will be under your control.

So, that leads to the next question, ‘How to take decisions always based on timeless investment principles?’

Though the question looks tough, the answer is simple. Create a principle based personalised financial plan. The power is in principle based financial plan.

Financial Plan – A powerful Solution:

To bring your personal finance under your control, financial plan is really powerful.

         i.            Personal Financial plan is created based on timeless investment principles, your goals and priorities.

       ii.            Personal Financial plan empowers you to close the gap between what you deeply want from your personal finance and the way actually you manage personal finance and take investmetn decisions.

      iii.            Personal Financial plan help you escape the tyranny of dilemma of investment decisions & market moods and march peacefully towards your personal finance goals.

     iv.            Personal financial plan stops you take decisions based on your mood or market mood.

       v.            Personal Financial Plan stops you take long tern investment decisions based on your temporary emotions. It helps you take rational decisions.

     vi.            Personal financial plan gives you clear direction to take any personal finance and investment decisions. Personal financial plan is like a light house which guides us whenever we need direction.

    vii.            Personal financial plan can guide us on

·         What amount of safety to look at and what amount of risk to take?

·         How much liquidity is required and how much can be locked in long term investments?

·         How much returns are required to meet my goals?

  viii.            You will stop taking investment decisions based on advertisement, sales pitch, scheme brochure; you will start taking investment decisoons based on your personal financial plan.

Conclusion:

Don’t allow any other forces to control your personal finance and investments. You yourself can consciously control the consequences of your personal finace and investment decisions by creating a personalised financial plan.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in

A Step by Step Guide to First Financial Plan

Prabu was a college student till yesterday. Today he has got a job. He has changed his costume from T-shirt and jeans to a formal wear with a tie. When he got his first pay cheque, his father advised him to save, his girl friend asked him to take her out on a date, and his friends wanted a party. Prabu was totally confused what to do with his first salary. What are all his actual priorities? Let us help him by laying out a step by step initial financial plan for him. 

Get a PAN Card:

PAN Card is an ID card issued by income tax department.  This card is useful in filing your Income Tax returns. Apart from this, the PAN card is very much useful in opening a bank a\c, demat a\c, investing in mutual funds and the like. The required documents for getting a PAN card is a passport size photo, address proof and an identification proof. You need to apply with either UTI or NSDL. They are the two approved agencies by income tax department for issuing PAN card.

Personal Accident and Disability Insurance:

Almost every day you can find a news column about road accident. It may be your colleague, your distant relative, your neighbor, your friend, your classmate. The stories of such incidents give us a reminder that the accidents can happen to anyone. The impact of these accidents on ones working life could be huge. Some accidents could reduce our employability temporarily or permanently. Personal accident and disability insurance policies will cover the financial losses arising out of accident and disability. 

You need to decide the coverage amount of this policy based on the estimated loss you may suffer because of accident. That is how much loss you may incur from employment temporarily or permanently because of the accident. This will cost you approximately Rs.1500 p.a for a coverage of Rs.10 lakhs.

Health Insurance:

Most people don’t think about health insurance very often.  But it comes to mind first when a loved one is sick.  Under health insurance, the insurance company pays the medical bills if the insured person becomes sick and hospitalized. Health insurance can protect a family from financial damage in case of severe and serious illness.

If you have a health insurance from your employer, that may not be sufficient. Employer may cover the employee and not his family members. And moreover these policies are not portable and cannot be individualized if you leave the job. Employer provided policies cannot be transferred to another employer in case you switch your job. Also employer provided policies will give you coverage as long as you are employed. Once you retire you may not be having coverage. 

It is really unfortunate that only after your retirement you need health insurance at the most. If you plan to take a fresh policy after retirement, insurance company will not cover the pre-existing diseases at that point in time. Though your employer provides a health insurance policy it is better for you to take a separate health insurance policy at least with a small amount of coverage.

The coverage amount of the health insurance policy need to be decided based on your health consciousness, your family health history, and the class of hospital you choose for treatments.

Term Insurance:

Generally as a beginner, there will not be any requirement for any life insurance. But if your parents are financially depending on you, then you need to cover yourself with life insurance. As a breadwinner, today you are there for your family to provide a lifestyle. In case of any mishappening to you, your family members should not compromise on their lifestyle. That is why it is advisable to cover yourself with life insurance if you have dependents.

But don’t fall prey for ulips. Go for a pure term insurance policy. These policies give you a high coverage with low premium. The premium for a sum assured of Rs.10 lakhs will cost a 25 year old only Rs.2500 p.a. approximately.

Emergency Reserve:

Once you have completed the above obligations, you need to build an emergency reserve or contingency fund. One aspect of financial planning involves planning for situations where there could be a temporary break in one’s professional income. This could happen, amongst other reasons, due to ill health or could even be self opted. Such planning requires creation of contingency fund. The size of a contingency fund is linked to one’s estimate of what could be the maximum duration of such a break. For instance some people plan for the possibility of a 3 months break, others for 6 months.

This emergency fund gives a psychological security to you. 

In case you need to quit you r present job and need to search a new one, you can do that comfortably and confidently as you have an emergency fund for the intermediate period. You need not panic. If you have created a contingency fund, in the event of any emergency you need not pre-close your other investments and hence you avoid paying penalty or booking losses.

Tax Planning:

You can save under section 80 C up to Rs.120000. Out of this Rs.20000 need to be invested in the infrastructure bonds and the balance Rs.100000 can be invested in NSC, PPF, insurance premium, and ELSS mutual funds., You can give maximum allocation to ELSS mutual funds, as you are so young and in the beginning of your career.

Other goals:

You may have other goals like buying a laptop, higher studies, and vacation. You need to plan for all these goals. You need to keep in mind two things before deciding an investment. They are your risk tolerance and time horizon. How much risk you are afford to take and psychologically comfortable in taking? When do you need this money back? Based on the answers to these questions you need to choose the right kind of investment plan.

Plan out your work and work out your plan. Normally we don’t plan to fail, but we fail to plan.If you work on your financial plan, when your friends are partying and taking their girlfriends out, you will be definitely going to be retired richer than your friends.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.