A quick Financial plan (age group 25-35 years)

A financial plan is a simple way to manage your finances, create wealth over a period of time and protect the wealth created. It is often thought that financial planning is for the higher income group or a thing to be done as we near our retirement. But in reality that is not the case, financial planning is for every earning person who whishes to achieve short term, medium term and long term financial goals.

Planning consists of majorly two aspects, first being wealth creation and second being wealth protection. It has been seen that people pay attention only to the wealth creation part of financial planning while protecting the so created wealth is neglected, this leads to leaks in the financial plan and over a period of time the half baked financial plan doesn’t work out. Here I am providing simple way to create a financial plan which will help you create wealth, strategize for contingencies and help you to achieve your financial goals in time.

1. Investment: Investing is the foundation stone of your financial plan. Understand the difference between “investing” and “saving”. The money lying in your bank account or the cash in your locker is not an investment. Any amount lying idle is a saving and not an investment. Investment is when your money starts making money for you. The cash in hand or bank doesn’t yield any return to you while on the other hand keeps on losing its value slowly and steadily due to inflation. Thus, it is always suggested to invest rather than save. Now that we have understood the difference, the next question is how much to invest? and where to invest? The answer to the first question varies according to circumstances but an individual having zero liabilities (loans) should invest around 25-30% of his/her monthly income. In case you have any debts to be repaid the amount can be on a lower side. Now we come to the second question, for this age group there different avenues that can be explored, Mutual funds, shares, being on the top of the list, followed by PPF, after that a portion can also be allocated to traditional insurance, Corporate F.D’s, Bonds. Other options like N.P.S, Bank F.D’s can also be explored.

2. Loans (debt repayment): Taking loans is never suggested but in various circumstances taking a loan is the only viable option, buying a house being one of them. Nowadays loans are easily available due to emergence of a number of finance companies. Before availing such a loan facility an individuals should think about his repayment capacity, interest on the loan availed, hidden charges, processing fees, and he most important question “Do I really need it?”. It is said that you can afford a thing only if you can buy it twice. For instance, if you are planning to buy an iPhone worth Rs.1 lakh, then you should have at least Rs.2 lakhs in your bank account, if you don’t have it you can’t afford and thus you don’t buy it. The same doesn’t work in case of buying a house, so you can follow some other way to tackle the loan without hurting your finances. Things to be given most importance in taking a housing loans are the rate of interest charged, tenure of the loan and E.M.I. Rate of interest on housing loans in the year 2021 is as low as 6.8-6.9% so you should look for such competitive rates before availing housing loan. Tenure of the loan should not exceed 20 years, the logic behind the same is you should not be repaying the loan till your retirement, loan should be repaid as son as possible. Now we come to the last part that is the E.M.I, the E.M.I of all loans taken should not exceed 40% of your monthly income. If in case it exceeds the same then the same might hurt your finances and you will have a small amount to invest for your future.

3. Emergency Funds: I have written a detailed blog about emergency fund but here I will explain the same in short. As the name suggests, its a fund kept aside in order to use in an emergency like hospitalization. Emergency fund needs to be in a form of liquid asset, it means it should be available all the time in case of emergency. Best example of liquid asset is cash-in-hand, another example can be cash at bank which can be withdrawn anytime through an ATM card. As discussed earlier, cash in hand or at bank do not provide any return so a better alternative to cash would be liquid funds. Liquid fund is a type of mutual fund where the risk is very low and the returns are in the range of 5-7% but the important feature of liquid fund is that it can be withdrawn in as less as 3 hours. SO the liquid fund when not in use provides a return of 5-7% while is always to use. Now that we have discussed about the emergency fund the next question is “how much should be emergency fund?. There are two ways you can find out the same. First emergency fund should be equal to 3 times of monthly expenditure. Considering a conservative approach it can be equal to 3 times of monthly income. This much amount should be set aside and should always be parked in order to be used in an emergency.

4. Insurance: Insurance is the “protection” part of the financial plan. By investing you are creating wealth but by buying insurance you are planning to safe guard the wealth from unwanted circumstances. Insurance is as important as investment. In case of an accident or hospitalization if you do not have a health insurance then in that case you will have to use the funds invested overtime to pay hospital bills, this will hamper your financial plan, or in case of death of the bread winner of the family, family members have to rely on the savings and prior investments done and will never be able to achieve their financial goals. Thus, every individual should get himself and his family members insured. Majorly 2 types of insurance are required by an individual, first is health insurance and second is Life insurance(term plan). Health insurance protects you from unwanted expenses of hospitalization whereas life insurance financially protects your family in case of your death. One of the problems with Indian households has been that they are under covered, i.e. the insurance bought is insufficient, for example an individual earning an annual income of 10 lakhs having a life insurance of 10 lakhs, in this case the individual is under impression that he has insurance and there is nothing to worry but in reality is something different, in case of his death his family gets only 10 lakhs which is equal to his 1 years income, this means that the family has funds only for the next 1 year, what are they supposed to do after that. This brings us to the question “how much insurance cover should I buy?”. The answer to that question is simple, in case of health insurance it depends on the locality, cost of nearby hospitals and other factors, but considering a normal scenario the cover should be equal Rs.5-10 lakhs per individual. In case of Life insurance, every earning member should buy a term plan, the cover can be calculated on the basis of annual income, i.e. Life cover should be equal to 20 times of your annual income.

These were a few tips which you can follow for making your own financial plan. Please take advice of a professional before taking any decision.

If you need any help in making a financial plan you can contact on below address

C.A Shubham Kandalkar

Whatsapp – 9920978346

Email – mr.investsmart01@gmail.com