Set your EMI to hit your bank account on the 1st of the month if you get your salary or income on the last day of the previous month.
Independence Day is a reminder of our determination towards calls to actions like “India will awaken to make its tryst with destiny”, “Gareebi Hatao”, Dream of “India Strong, Independent, Self-reliant” “Vision of India which is free of hunger & fear”, “Atmanirbhar Bharat” and many more. While I am in awe of these visionaries and their passion for nation-building, it makes me reflect on my contribution as a parent and a leader of the family unit and what can I do for my country.
Fundamentals & Financial Plan
Every journey starts with a vision or a dream or sometimes a picture of the end state in mind. In our current context, it is to give wings to our children to fly out of the nest confidently in their quest to fulfil their dreams. Apart from providing the fundamentals of “Roti, Kapda & Makaan” – the essentials to make a living, it is important to build a financial plan. A starting point for the same is to have a comprehensive worksheet that captures your assets/liabilities/income/expenses.
Assets can include Bank accounts with numbers & nominees (Savings Bank / Fixed Deposit/Locker), Insurance policies with renewal/ maturity dates, nominees and sum assured, Mutual funds with at least quarterly holding statements, Retirement benefits details like Provident Fund, National Pension Scheme, Voluntary Provident Fund & Public Provident Fund, Shareholding statements every half year, House/ commercial property, Vehicles & Jewels/Gold
Liabilities can include Home Loans with EMI/ Interest and Principal payable this year, credit card outstanding, & all other loans EMIs.
A budget sheet for the year with month-on-month details like:
- Savings (Emergency fund, PF, Investments, SIP, etc)
- Income (Salary, Rental income, Any other recurring income)
- Expenses (all recurring – Food, House rent, Clothes, Education, Transportation, Entertainment, Health & Vacation)
- It is important to visualise dreams and make a separate plan for each. Please solicit the services of an expert – in this case, a financial planner who is well-versed with the above if you are not able to do justice.
Resilience to shocks
All roads have bumps and everyone faces a sin curve of ups & downs in their lives. If your shock absorbers are good, then you will be resilient and able to manage temporary challenges like illness, hospitalisation, accidents, and unforeseen loss of life. A smart way of doing this is to transfer such unforeseen risks. A good health, motor accident insurance for the family & vehicle ensures that the life savings meant to pursue dreams are not re-channelled for accidents or health emergencies. A good term life insurance policy serves to replace the income of the bread earner inadequate measure and retain the freedom of the child to fulfil his/her dreams.
While we embrace debt as a necessity to invest in immovable assets like a house and movable assets and services, we should also embrace the debt repayment mechanism with equal fervour and work towards the early settlement of the debt. These can be done in simple steps like:
- Pay your credit card bill on or before the due date to avail benefits of the credit cycle and yet not any charges
- Set your EMI to hit your bank account on the 1st of the month if you get your salary or income on the last day of the previous month. In parallel, explore reducing the tenure of your loan with small pre-payments of long-term loans by using windfall gains
- Protect your long-term debt with an insurance cover that reduces along with the principal outstanding
Receiving good education empowers the child to determine right from wrong. Formal education through an institution should be supplemented with the education of values that the child can only get at home in his/her formative years. I would advocate financial education at an early age in addition to the above. This can be done by:
- Opening a bank account or gifting a piggy bank to encourage the ethos of saving at an early age
- Teaching a teen to create and manage a budget for an activity like a holiday. Apart from feeling independent like an adult which is empowering, it also helps build responsibility
Discipline to Save before spending
We do not need to be the Oracle of Omaha to understand the benefits of discipline when it comes to savings and investments. The simple formula of “Income – Savings = Expenses” can go a long way in building long term savings.
- Your SIP (Systematic Investment Plan) should hit your bank account soon after your EMI
- You may want to explore having 2 bank accounts – one for managing your savings and one for expenses
Oh, A contingency or an emergency
Large organisations create contingency reserves to overcome unforeseen challenges. Many have a Business continuity plan to overcome emergencies and serious incidents. You could do the same for your household and put aside 3-6 months of income into a liquid investment. It may help to park it.
Measure & Monitor plan annually
After doing all the above, it is important to assess your plan periodically (at least quarterly) and review it at least once a year to explore new dreams or to keep tabs on new avenues of income/expenses.
by, Sunder Natarajan, Chief Compliance & Risk Officer, IndiaFirst Life Insurance Company