(Ratish Mohan Sharma is head-finance at NDTV Convergence Limited; he is a member of Institute of Chartered Accountants of India)
Financial planning helps individuals prepare for monetary commitments in the future. The following 10 commandments are aimed at mid-level salaried employees, who are just starting with financial planning and don't have much existing savings:
1. Start saving early, as soon as you have money at your disposal.
2. Start with whatever trifle amount you have; saving in small tranches today is going to be useful in future.
3. Spend after you have taken care of your planned savings and not vice-versa.
4. Attempt to build the following funds over time:
- Emergency fund meant for unforeseen and immediate cash requirements: A fund 3 to 6 times (or 3x-6x) your monthly household expenditure is a good amount. It can be kept in the form of FDs (fixed deposits) linked to your savings/salary account. Keep Rs 20,000 to Rs 30,000 in cash at home.
- Education fund: Though no size fits all, it's advisable to save Rs 5,000 to Rs 20,000 per child per month over 15-20 years (with a 10 per cent increase every year). Invest in a SIP (systematic investment plan) or another convenient investment option.
- Marriage fund: A monthly saving of Rs 10,000 to Rs 20,000 per child per month (with a 10 per cent increase every year) shall be helpful. A mutual fund that invests in gold can also be an option to consider.
- Property fund: It is suggested to start saving Rs 5,000 to Rs 10,000 per month for down payment, which may vary from 10 to 20 per cent of property value. If riskier investment options like equities are used for the initial investment then do convert them to safe investments 2-3 years prior to the expected date of down payment.
- Fitness fund: Most diseases today are emanating from poor lifestyle. In short, do spend regularly on fitness and lifestyle. You can start with an amount of Rs.1,000-5,000 per month.
- Travel fund: A travelling experience can certainly help you unwind and can also save some money in taxes. Savings of Rs.5,000-10,000 per month are good to begin with.
- Retirement planning: PPF (public provident fund) and mutual funds are good options. To reiterate, be regular in your savings.
5. Insurance: The following are the minimum to have:
- Life insurance: It is essential to have a life cover to take care of obligations like home loan, vehicle loan, personal loan etc. Earning member(s) of your family must have life insurance in place. An amount equal to 5x-6x of annual household expenditure with an annual increase of 10 per cent is good to start with.
- Mediclaim: Even if your office provides you with mediclaim, it is pertinent to assess if the cover is sufficient considering your family members' health and age. You would be required to keep increasing the amount of insurance cover keeping in mind the increasing cost of medical treatment.
- You may also like to take a fire insurance policy for your house, a travel policy while you travel etc.
6. Don't lose money: At times, it is easier to lose money due to ignorance or mistakes, e.g. by defaulting on a credit card payment or not renewing your insurance policy on time.
7. If you are left with money after all your committed savings, a holiday home could be a good idea. It can also earn for you.
8. It is advisable to write down your financial plan and review it at least annually if not earlier. Changes in tax laws and interest rates can impact your returns.
9. Consider the post-tax returns. Your FD may earn a 9 per cent return but, but assuming a tax rate of 30 per cent, the effective return could be just 6.3 per cent.
10. Don't put all your eggs in one basket: While investing, make sure that you don't put all your funds in one type of investment. It could be a mix of property, equity, mutual funds, FD/debt instruments, gold etc. While investing in mutual funds, you can pick some diversified funds.
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