A guide to financial planning

Everyone has various financial goals in life and most of them have these questions revolving in their minds.

1) If the school fees of my child is Rs.80000 per year then how much is it going to increase annually year on year and how will I arrange for the same year on year.

2) If the cost of higher education of my child in today’s value is 10 lacs then what would be the the cost when my child turns 18.

3) What would happen if I am no more tomorrow.Who will fund for my child’s dream and ensure that graduates with honours.

4)  If I plan to buy a flat / house worth 80 lacs today’s value, what will be the cost 5 to 7 years from now.

5) I am planning to retire by 55 years .How will I take care of my expenses as well as my wife’s expenses post retirement.Will my EPF and other investments  be sufficient to maintain the same kind of life style which I am living presently.

6) Hospital bills are raising day by day .How will I take care of my hospital bills when I am old and fall sick.

7) Will 9 lacs be sufficient to take of my daughter’s wedding expenses 10 years from now.

8) Will I be able to enjoy a vacation with my family every 3 years.

10) There are so many provisions available to save taxes.How to make sure that I save tax to the maximum.

11) I am earning and have a good pay package.Am I making a right investment and am i choosing the right product when it comes to the complex products that are available in the world of investments.

12) Am I allocating my assets in a proper manner to shield them against inflation, market crashes, protection of capital etc.

13) I am investing , but will the investments serve the purpose, needs etc.

14) How can I make sure that the assets that I have acquired and the acquisition that I will make in future will pass on smoothly to the next generation as per my desire.

In case you have at least 7 similar question in your mind and have no idea how to solve your financial issues then welcome aboard into the world of financial planning.

How can financial planning help you ?

Proper financial planning can help you to plan and accumulate funds for his/her child’s education and marriage, plan and accumulate funds to buy a dream house, car etc, accumulate funds for vacations in India and abroad.

Financial planning helps to find out what is the quantum of insurance that one needs.It is mapped with the goals that a person has to achieve, the liabilities that he person has made while acquiring assets.

Financial planning helps to bring down your tax liability and finally ensure that your assets are passed in the right hands after the demise.

Financial planning also helps a person build a retirement fund to make sure the person enjoys the same lifestyle that he is presently leading.

The steps to proceed for a good financial planning are :

1) The financial planner and the person for whom financial planning has to be done meet each other

2) The person asks various questions regarding the skills and knowledge that the planner  possess, the scope of work that the planner has to deliver.

3) Once the person is convinced with the financial planner’s confidence level and knowledge base the planner possess he asks to planner how to proceed further .

4) The financial planner does these below steps.

     a) Establish the client planner relationship.:The planner discuss his scope of work and his exact role that he will deliver to his client.

     b) Gather client data and determine goals and expectation.: The planner gathers all the    data needed  to implement a viable financial plan for the client.He also expects the client to give all relevant information required.

     c) Analyse client’s objectives, needs and financial situation.The planner gets a fair ideas about what are the goals and objectives of the client.Using the collected information and the skills of financial planning, the planner analyzes the information which enables the creation of financial plan.

     d) Develop appropriate strategies and presenting a written financial plan.After analyzing the needs of a client the planner develops various scenarios and discuss the same with the client.A planner finally presents a detailed financial plan to the client.

     e) Implementing the financial plan: A lot of efforts goes into building a financial plan Once the plan is presented to the client , it solves the client’s problem only on paper.Through the financial plan the planner delivers a list of recommendation and a plan of action to the client.The real hard work begins later when the recommendations has to be turned into reality.This implementation part of the financial plan is perhaps the most important.It describes how the planner and the client will work together to implement the same.

     f) Monitoring the financial plan.: The success in financial planning is achieved only when all the financial goals are met.The financial planning process does not end as soon as the plan is handed over to the client and the client acts on his recommendations.Financial planning is a continuous process where regular monitoring and periodic evaluation is necessary to ensure that things are happening as per the plan.

Fianacial planning is a highly personalized service.It is not a product.It is a cyclical service that constantly repeats as a client needs changes over time. Preparation and implementation of the financial plan is a long term relationship and not a one-off exercise.For the success of the financial planning exercise, it is essential that a prospective client should have complete confidence in the financial planner’s capabilities.It is a multi-dimensional process.

I personally feel financial planning is a must in case you are planning to achieve the ultimate aim of spending a retired life peacefully without compromising living starts.Please write to me in case of any doubts.

All the best for your future financial life.

The author of this article is director of M/s.Grow Wealth , an advisory firm for financial planning in the personal finance domain. You can reach him at deepesh.mehta@yahoo.co.in.

What an investment of just Rs.2000 per month can do.

This post talks about the beauty of what a small saving habit can bring a change in one’s life.

Mr.Vikram is 28 years old.He is earning a take home salary of Rs.45000 per month.He invests just Rs.2000 per month and he has plans to invest till he retires from his life.He plans to retire by 58 years of his age.

Can you make a guess on what would be the amount accumulated on the last day of his job from the investment that he did during his earning phase of his life.Here we assume that his investment makes an average return of 14% compounded annual growth rate .

Here is the answer .It is ONE CRORE ELEVEN LAKHS. That sounds very nice and everyone reading this post would love to accumulate a similar corpus like what Mr.Vikram would accumulate.

Now think what would have happened if Mr.Vikram doesn’t invest Rs.2000 per month and he spends the same .He may think that just a small portion of his salary (Rs.2000) is getting spent and he feels it is fine.According to me just a expense of Rs.2000 per month would bring his net worth by 1.11 crores during his life time.

This is called as the power of compounding.For you as an investor to benefit from the power of compounding you need to keep these five rules in mind.

1) You need to have a disciplined habit of savings.

2) You need to give more time for money to grow and only then it will reap the harvest for you.

3) If you figure out that you can’t invest more money in your later stage of life (due to other financial commitments)  then try to invest more during the first few years of your earnings.

4) You shouldn’t withdraw in the mid of the investment phase.A small withdrawl may bring down your portfolio drastically.

5) Start your investments as early as possible.If you have not yet started then this is the right time to go start off with.

To sum up Albert Einstein called the power of compounding as the eighth wonder of the world.So start off your investments today to reach that magic figure or if you have started your investments then try to increase the same by cutting down your expenses.

Have a nice day .

Regards,

Deepesh Mehta

Importance and advantage of asset allocation.

     Mr. Rakesh is a hard saver.He believes that money saved  is money earned .Some of us also have the same kind of belief.Well this is really a good from an investment point of view.but he believes that real estate is the only asset that gives maximum returns most of us who own a real estate have actually seen our property getting appreciated over a period of time and hence have a similar belief.

   With this belief he goes and invests all his money in a residential apartment.He makes his down payment from all the money that he has saved and the rest( around 80%) is borrowed from the bank and he pays the EMIs. He is happy that the prices of real estate has gone up.One day recession strikes and Mr .Rakesh  loses his job.He is no more capable of paying his EMIs and hence puts his flat for sale.But due to recession , though he has invested in a prime location he has failed to find a buyer at that price.All the eggs in a single basket is very risky.

There is never a single best asset class for ever.

The case of Rakesh is the case of many people.We often look at one particular asset class which according to us is the best investment that we can do.For some it may be real estate and for some it may be gold or any other asset.We never think that the returns that a asset has delivered is because of the current economic scenario and is bound to change sooner or later.We get tempted with the returns that our friends, neighbors, colleagues have made from their investments..We get tempted when a bank announces it gives 9.5% returns per annum and try to invest the maximum that we can .We never understand that will that return ever beat our inflation.

Similarly if shares and equity mutual funds perform well then we make the mistake of putting all the money there and expect it to give us a double digit return every time we invest in that asset class.

Then what is the right asset allocation

If there are some many investment options available then what should be the right asset allocation for us.To answer this question I would simply put that the right asset allocation depends on your age, personal income, goals, family income,flow of income, risk taking ability etc.Every one has a different case and hence every asset allocation has to be a unique one.A good financial planner can guide you on the same.

What asset allocation can do for investors .My answer is it can do WONDERS if the assets are properly distributed .A proper asset allocation should and will help you to reach your desired goals over a period of time, should help you to bring down your liabilities,should help you to fund in case of any emergency cash crunch and most important it will bring a peace of mind.

Happy investing  and do check whether your asset allocation is properly done or not.

Few Warren Buffet quotes

Hello Friends,

Here are few warren buffet quotes that I am writing today on my blog.Please read it as I find them very relevant in the field of investments.

1) Wall street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.

2) Rule No.1 Never Lose money.Rule No.2 never forget rule no.1

3) Never invest in a business you can’t understand.

4) The investor of today does not profit from yesterday’s growth.

5) If you are in a poker game and after 20 minutes you don’t know who the patsy is, then you’re the patsy.”

6) Risk comes from not knowing what you’re doing.

7) Only when the tide goes out do you discover who’s been swimming naked.

8) If a business does well, the stock eventually follows.

9) Our favourite holding period is forever.

10).Price is what you pay. Value is what you get.

 

Please read these again and again as these quotes certainly hold some meaning in all our lives.

Happy Investing.

Type of Insurance you must take .

Dear Readers,

Today I would like to make you aware about the type of insurance policies one must have in their life.

1) Life Insurance: If you are the bread winner of your family and your family depends on you for all the expenses then you need to have a life insurance policy for adequate cover.(to find out the adequate cover of yours refer and read my previous blog titled HOW MUCH INSURANCE SHOULD YOU TAKE ?)

One important advice to all of you is in case you are earning and your spouse is a housewife never take life insurance on her name.The reason behind this strong advice is in case of your unfortunate event your wife has to bear the burden of her day to day expenses as well as pay her  premium .

2) Health Insurance : Health insurance covers your hospital expense in case you are hospitalized due to illness or if you have met with an accident .Health insurance must be taken for all the family members for whomsoever it is possible.It is always advised  that you keep renewing your policy year on year.The benefit here is you will be covered up to 70 years of your age even if you claim year on year.

In case of health Insurance , you can change your insurance company without any charges or reduction in risk coverage.Since there would be competition among insurance companies to retain their customers you will be covered with a low premium for the same amount of risk covered.

It is also advised that you take few riders while getting yourself insured.( A detailed article will be written on my blog in future)

3) Household insurance policy : A household insurance policy covers your risk in case there is fire, burglary or any untoward incident that has taken place in your house.Please make sure that you are adequately covered.

4) Mortgage protector  insurance  : This policy has to be taken in case you have created a liability while acquiring an asset.The insurance keeps on reducing as you keep on paying the EMI. In case of any unfortunate event the balance outstanding liability will be waived off as the insurance company would pay to the lender of the loan.

5) Vehicle insurance : This is mandatory insurance that has to be taken if one possess a vehicle.Please take a comprehensive policy and not just third party insurance.

Insurance policies to be avoid.

Most of the people in India either are under insured, not insured or have taken a wrong insurance policy.Few wrong policies that are mis-sold are child plans,pension plans, savings plan etc.Also in India people club investments and insurance together.Please let us understand that insurance is a different concept and the need of the same arises to reduce the risk, to cover the risk or to transfer the risk to the insurance company.And the purpose of investment is to enhance wealth and a mode to achieve a long term goal.You can create your own child plan, pension plan by taking the advice of a good financial planner.This is a more flexible and a cheaper option.

Always link life insurance with your financial goals and the liability that you have.( To understand more on this please refer to my previous blog named HOW MUCH INSURANCE SHOULD YOU TAKE ?)

Please feel free to comment on the same .Happy investing.

 

Regards,

 

Deepesh Mehta

How much insurance should you take ?

Dear Readers,

My clients keep on asking me what is the quantum of life insurance that he/she  need to take to make sure that  he/she is completely insured.My answer goes like this-

1) Please note down your current life insurance policies cover that you presently have.

2) Note down the financial  goals that you have aspired and planned to be met in the future.(Your goals can be your child’s education, marriage expenses etc).

3) Note down the outstanding liabilities that you presently have.A liability can be paying an EMI for car , house etc.

Now check out the following example to understand how insurance has to be take and for what amount.

Joseph is 30 years old working in a MNC with a take home salary of Rs.80000 per month. He stays with his wife and 2 children aged 4 years and 2 years.His father had taken a traditional endowment life insurance policy  on his name 8 years back and for a period of 20 years for a risk coverage of Rs.3 lacs. Joseph has recently bought a house and availed a housing loan of  30 lacs from a bank for a period of  15 years and paying an EMI of Rs.34000 per month.

He dreams to provide higher education for both his children and he has assumed the expenses to be 10 lacs each as of today’s value.

Let us see how much insurance that Joseph should be taking.

1) He is currently covered for Rs.3 lacs.

2) He has an outstanding liability of Rs.30 lacs.

3)He dreams to send his children for higher education.So his cost of education when the first child attains 18 years of age is Rs.26 lacs and for child two it is 30 lacs.

He should take a mortgage protector insurance.This kind of life insurance is cheaper and is linked to a liability that was created in acquiring an asset.In his case during his tenure of paying EMI in case of his unfortunate death , the legal heir of the asset(house) need not pay any further EMIs and the balance of loan outstanding as on the date of his death will be paid by the insurance company.Hence his wife will inherit a house and not the burden of paying premiums.

His total cost of education for both his children is Rs.56 lacs at the time of attaining the goal when we consider inflation.He has a take a term insurance for Rs.56 lacs-3lacs(his current endowment policy)= 53 lacs. for a period of 16 years .The premium for this term insurance is Rs10000. per annum.

Now with this he had made sure that in case of his early death(death before his goals are attained) all his dreams would come true.

This is the actual way of taking a life insurance.Unfortunately in India investors club insurance and investment and always look for a return out of it in case they survive after the maturity.

Please feel free to ask questions and give comments.

Emergency funding planning

Rahul is 32 years old and earned a salary of Rs.80000 (take home) per month.He had a personal  expenses of Rs.30000 per month plus he was paying an  EMI of Rs.40000 per month.He was left over with 10000 per month out of which he invests Rs.5000 in a post office  RD account every month which has no premature withdrawl facility..Now after all his  EMI, personal expenses, investment in RD account he was saving Rs.5000 in his salary account  which again he spends for an unpredictable small expense month on month.

You might feel that he must be leading a comfortable life, in fact he lead it for a couple of years .But one day his company where he was working suddenly went bankrupt and sent a circular to its employees that the company is going for a permanent lock out.What should Rahul do till he gets a new job job or in fact what should you do in case this happens to you ?

As a financial planner if you ask me, I would suggest that Rahul should have kept 3-6 months of his monthly expenses in liquid fund account of a mutual funds or in a savings bank account, before making any commitment towards EMI or investing in a RD account.

Rahul could have borrowed money from his friends, relatives etc.But is very embarrassing to borrow from your near and dear ones to take care of your personal expenses. Remember that always have a buffer before starting off going in a big way in your expenses.