Your best financial planner - YOU

Hello..a few years back I was completely unknown to this word 'financial planning' till the time I was taught how simple and easy it is to achieve my financial goals by doing small,regular and disciplined savings and investments,to achieve financial security and of course financial freedom!

               I was always wondering why I was not able to save even 10% of my salary by the end of month, even with the salary hike next year I started spending more which led to the same result- No savings! This was due to two major reasons-

1. After doing all investments given in section 80C for tax savings, I thought this is it! No more savings required
2. No planning, and of course more money I see in my account, more I spend :)

              But not anymore...with the small amount kept aside every month and parking it in safe investment instruments, I feel more secured and now I spend rest of the money without thinking twice! The facts which I am going to share with you are very basic which can help you evaluate your present investments, financial security and make your money work for you even when you are sleeping! ....also it may save you from committing long term mistakes like paying for combined Insurance + Investment plan for saving money which is locked for 10-20 years, with nominal returns.

Below is the simplest and easiest model to understand your relationship with your money and how to use it wisely-

Step 1: Financial Security 

Ask below questions to yourself and find your own answers about how secured you are financially and what needs to be done if you are not-

1. Do you have any dependents ? (Spouse,children,parents,siblings etc who are dependent on you for their financial needs) 

If No - Good.

But if Yes - do you have something which will replace you as an income source in case you would be no more or permanently disabled ? 
Tough thing even to imagine, but bad luck can hit anyone anytime.. Have you secured your loved ones from this insecurity? Who would pay education fees for your kids or siblings or take care of your parents' medical expenses?

Answer : INSURANCE

Well there is a sub question too for you in case you already have taken insurance... 
2. Is your insurance cover adequate?  

Insurance is adequate when the Sum Assured is enough to cover your dear ones' expenses in future without depreciating their current living standards.

If Yes - Your family should be proud of you for being so responsible :)

If No - You must be connected to internet as you are reading this...Compare Term insurance plans online and take one right away! Get yourself insured right now. Here, ignorance is not a bliss!

Little about Term Insurance:
                            Term insurance is a pure insurance policy which gives larger cover than traditional LIC policies in a very low premium. There is no return in Term insurance but the premium is also negligible as compared to endowment/Money back policies if compared.

INSURANCE is NOT for INVESTMENT:
                             Most of us fall for the promises made by our relative-cum-insurance agents and start investing a big amount in endowment policies to get returns. We do not realize that the money gets locked for 10-20 years and cover is not enough in case of any unfortunate event. We keep paying just to get tax benifits in 80C !
Solution: Take term insurance (e.g. in Rs.5000-8000 premium (depends on age), we get Rs.50 lakh cover) , Invest remaining amount in PPF to get better returns(around 9%) than money back/endowment policy(only 5-6%)

Also do not forget to take Health insurance for yourself and your dependants, it will protect your savings from the heavy medical expenses.(I will write more on health insurance later)

Step 2: Income Protection

A person has Rs.100 today and he keeps it in his pocket for 2 years. Will the value be same after 2 years? Yes , of course. It will still be Rs.100. BUT-
If he can buy 8 apples in Rs.100 today, He may get only 4 after 2 years!

The purchasing power of that Rs.100 note would have been slashed by a margin equal to the inflation rate every year!

Preserving your income means putting your hard earned money in some investment instruments where it will be protected from inflation, i.e. you must get returns higher than inflation rate every year.
Some very popular investment types are-
1. Bank fixed deposits
2. Post office schemes
3. Debt Mutual Funds

4. Govt/Corporate Bonds
5. Public Provident Fund 

While choosing above debt instruments, we must make sure that the returns are higher than the current inflation rate.
Wait...there is one more thing other than inflation that eats your money ..TAXES! So your absolute returns on your investment means what you get after tax deduction.

Lets make it simple, while choosing investment option consider the interest rate and tax on returns.

Returns on bank FDs attract taxes according to your tax bracket. There is no tax on returns from PPF(tenure of PPF is 15 years). In case of debt mutual funds, both short-term and long-term capital gains are taxed. Short-term capital gains are added to the income and taxed as per the individual's income tax slab. Long-term capital gains from debt mutual funds are taxed at 20% with indexation and 10% without indexation. Indexation is adjusting the purchase price for inflation. This increases the purchase cost and, thus, lowers the gain.After the budget of 2014, "Long term" for debt funds is increased to 3 years from 1 year earlier.

So park your hard earned money in these safe investments to have a contingency funds ready in case of emergency but you wont become rich by keeping money in debt instruments, so once this step is done move ahead confidently for "Wealth Creation".

Step 3:  Create Wealth !

Worldwide, the top three ways to create wealth are -
1.Business
2.Business
3.Business

Yes, that's true! lets elaborate this further
1.Doing your own business
This is a topic of another blog altogether, well if you have the knowledge and resources to start your own business that's the best way to create your wealth as no other investment can give more returns than your profits. But as we know this comes with a huge risk and is not everyone's cup of tea!
If your are not confident doing a business on your own, why not invest in other's businesses which are going on well-

2.Equity
Stock market provides an ocean of opportunities for the people looking to invest in other's businesses. Companies which are listed on stock exchanges allot shares to the individuals at a particular price and gives returns according to the profit they make.
Safest option is to invest long term 5-7 years in good companies and avoid day trading. Trading can give you quick money but you may loose your money as quick too. So don't trade, Invest! 
Note: Our country has seen a lot of disasters in last 20 years which affected the markets directly, but SENSEX rose from below 4K in 1994 to above 26K today!

3.Investing in other's businesses with the help of good fund manager
Are you a kind of person who wants to make money but neither can do a business nor has a knowledge or time to invest in shares? No worries, fund managers from reputed banks and fund houses like SBI,ICICI,HDFC and many more can help you invest in equity through "Equity Mutual Funds". Here you give your money to the fund house and their experts invest it in the market on your behalf, how cool is that?
This minimizes the risk as the fund managers are experts in this domain, they invest in diversified portfolio of equities and companies in varies categories that too for long term. Mutual funds are also rated by financial institutions like CRISIL which helps us selecting good funds which have performed in the past and given higher returns.
There are many types in EMFs-
1.Large cap funds investing in bluechip companies like Tata,Reliance,SBI etc and has comparatively less risks
2.Small and Mid cap funds invest in companies with small or medium capital but gives higher returns than large cap funds
3.Hybrid funds invest 65% in equity and 35% in debt hence balances the risk according to market conditions
4.Thematic funds invest in companies in same sector like banking,IT,Pharma etc and this has sector specific risk

Equity mutual finds are linked with equity markets and has the same risks associated with them, so again the investment should be long term.

SENSEX Graph and Why we should invest long term-

There you go..Now you know almost all the options in brief to start your own financial planning in line with your financial goals. Create a good portfolio, take help of a financial adviser if needed and start making money everyday! Remember, every day you are not invested, you loose money! But as Warren Buffet says, don't measure the depth of a river by both the feet. Don't put all your eggs in same basket. Create a well diversified portfolio with debt and equity funds after completing first 2 necessary steps.

If you are young, invest more in equity as your risk appetite is good else invest more in debt funds.Golden rule to follow is the percentage of Debt investment in your portfolio should be equal to your age! Rest all should go in equity.

 Contact me if you are interested more to learn, I would tell you where I am learning from!

All the best for your Financial Freedom!