FINANCIAL PLANNING – FUNDAMENTALS TO DO
If you plan to become financially stable, you should understand a few fundamentals of financial planning to lay a foundation. There are mainly five attributes to concentrate on.
- Plan & List out your Budget
- Term Insurance
- Medical Insurance
- Close all Debts
- Emergency funds.
FINANCIAL PLANNING – BUDGET PLANNER:
Budgeting is done in most of the family, but not in paper or a notebook. If your budgeting is done in your mind, you can’t co-relate it again and check where you have spent more.
This is a big problem why most of us are unable to save money. So, once you start a month start with budgeting, and spent as similar as your budget. Do your budgeting in a note or a diary and check it weekly or monthly.
When you frame our budget allocate some percentage of your earnings to savings and then plan your expenses.
Please refer to the following table for sample budget planning.
|2||House rent / Home EMI|
|4||Vegetables & Fruits|
|8||Personal Loans / EMI’s|
|10||Petrol / public Transport|
|Difference (Plan vs Actual)||0|
Most people complicate between “Term insurance” and “LIC Policy – Endorsement plan or cashback policies”. Term insurance is the only perfect life insurance.
The yearly premium will be less compared to other policies but the sum assured will be ranging from 25 lakhs (min). The only thing people need to understand is term insurance has to be taken by the person on whom the total family responsibility laid.
To be simple, if person A takes term insurance at age 25, coverage for the next 35 years i.e., till his age 60, the sum assured is paid off only if person A is no more (late) in the covered years. The reason death may be due to accidental or hospitalized or due to some disease.
Before buying term insurance please check the benefits of the company you apply for and what the coverage conditions, Claim Settlement Ratio (CSR) which is primarily more important. Above all take the policy in well-reputed companies.
One should minimum take coverage up to 1 crore, which will benefit financially the family who really on them after their death. They can’t be replaced back physically but their term insurance can support their family financially.
Medical insurance is primarily the most important gadget to add to everyone’s life. In recent times we might have witnessed many new diseases sparking into the human world.
If we don’t have medical insurance, we may end up getting loans or wash off our savings. It’s very hard that we save every penny of money and end up in loosing for a known or unknown, curable or non-curable disease.
It’s better that we take medical insurance at an early age when we don’t have any previously treated or undergoing disease. It is always advised to choose a coverage plan from a minimum of 10 – 15 lakhs and maximum as per your need.
Few people would have corporate medical insurance offered by your employer, but the coverage for your total family will be 3-5 lakhs maximum for a year. This will not a suitable one in long run.
What all one should have on their watch list while purchasing a Medical Insurance?
- Claim Settlement Ratio of the company
- No Claim Bonus (should be equal or more than 100%)
- Pre hospitalization & Post – Hospitalization coverable days (Normally opt for 60 days cover in both the parameter)
- Free Medical checkup benefits
- Number of hospitals covers under your insurer
- The policyholder also has to look upon, after how many years the treatment for pre-existing or ongoing treatment disease will be covered up
- The policy has to cover all medical conditions, critical care, disease like cancer covers
When should I plan to purchase a Term Insurance and medical Insurance?
An individual on whom all the family responsibilities laid on, have to insure himself and his family members at an early age. For Example, before age 25 will be always a good period to get insured. Where the yearly premium will be very low compared with one who buys the insurance at the age of 45.
So, plan wisely and buy both Term Insurance and Medical Insurance at the age of 25, if not you have purchased both these plans at your 25’s, it is not too late to buy instantly.
Note: Always consider the amount spent in securing these insurance plans (Term & Medical Insurance) as an expenditure in your part of life as how you spent on vegetables and fruits or other groceries
CLOSE ALL YOUR DEBTS – FINANCIAL PLANNING:
Once you have purchased term insurance and medical insurance, the next step is to clear all your debts.
Another fundamental in financial planning is to close all the debts. This is the main reason for everyone to become very poor in having a healthy financial goal.
There are two methods to plan and clear off your debts.
- Avalanche Debt Method
- Snowball Debt Method
Avalanche Debt Method:
The Avalanche method is basically planning your debts to clear from the highest interest rate to the lower one. Like credit cards interest rates vary from 24-40% PA, has to debt-free first. Then personal loan in which interest rates will be between 12-18% PA has to clear after clearing credit cards. This is how the Avalanche method works. Select the highest interest paid loans to be cleared first and so on.
Snowball Debt Method:
The Snowball debt method works inversely to the avalanche method. Physiologically we people use to get some boost if we clear at least a single debt. So, choosing the lesser interest one or lesser debt amount like agriculture loan, gold loan, etc. Once you clear the lowest debt, then moving to the next lesser loan amount or lesser interest rate, and so on.
FUNDAMENTAL OF FINANCIAL PLANNING – EMERGENCY FUNDS:
This is the most important fundamentals to do before financial planning
Why Emergency fund?
Most people are in private jobs, small businesses, entrepreneurs, or self-employed, where our job and business are uncertain. In recent times, we might have heard mass lay off, shut down of many MSME manufacturing sectors, hotels, etc. In this kind of situation, if we were well planned for our 6-12 months of our expenses as savings, we won’t go into stress on managing family.
How much to save for emergency fund:
Employees: The job going people should have at least 6 months of their monthly salary in savings as an emergency fund.
For example, if a person ‘A’ is an employee working in ABC company gets a monthly salary of 15000. Then he has to save min 15000 x 6 months = Rs. 90,000/-
Self-employees: The self-employees or small business people have to save at least 12 months of their monthly budget. It would be safer if they save for 18 months.
For example, if a person ‘B’ is self-employed owns his own engineering works business. His family budget for a month is 25000, then they have to save at least an amount of 25000 x 12 months = Rs. 3,00,000/-