After writing many blogs, I believe it is time to reiterate the basics of Personal Finance Management. There are 3 pillars of Personal Finance Management a) Risk Management b) Goal-based Financial Planning c) Estate Planning
Risk Management
Emergency Fund
- Get it ready as soon as you can
- Keep 6-12 months of expenses aside
- You can use a combination of instruments such as Credit Card, Savings Accounts, Money Market Funds, and Fixed Deposits
Health Kitty
- If your family has a history of health issues, keep some money aside for health emergency needs
Term Life Insurance
- Purchase it as soon as you have financial dependents
- The coverage amount is the amount that is needed for your family to manage their financial needs in your absence, taking into account your existing assets and liabilities
- Purchase pure Term insurance with no return of money
- Pay premium periodically (Avoid single pay or limited pay option)
- Purchase it directly from the Insurer
Health Insurance
- Take private health insurance even if you have corporate coverage
- Increase the amount periodically to account for family additions and inflation
- Key criteria for Insurer selection – Good network of hospitals in your area of residence, No limits on Room Rent, Day Care Treatments, Domiciliary treatment, Home Health care, Zero co-pay, Non-medical expenses coverage
- Take a combination of base and super top-up policy to reduce overall premium
- Purchase it through a reliable agent for support during claims
Be transparent in declaring your health conditions in the insurance applications. Keep a copy of the declaration for your records.
Goal-based Financial Planning
- Define your Risk Profile
- Decide your Asset Allocation
- Finalize goals, amount needed and priority
- Take advantage of Government Savings Schemes such as PF, VPF, PPF, NPS
- Ensure readiness for Short Term goals (e.g. Goals due in the next 5 Years) – Investment should be in Debt instruments (e.g. Savings Account, Fixed Deposits, Arbitrage Fund, Liquid Fund, Money Market Fund, Target Maturity Funds (TMF))
- For Long Term goals, keep money in a common investment pool. For Debt investment, consider TMF and Gilt Fund. For Equity investment, consider Index Funds, Flexi Cap Funds, and International Funds. On a large portfolio, a small investment can be considered in Gold and REITs. When the Long Term goal approaches near, move the money identified for that goal in the investment recommended above for the Short Term goal.
- Choose tax efficient investments and invest in Direct Mutual Funds
- Diversify portfolio across asset classes and geographies
- Review portfolio once a year
- Rebalance portfolio when asset allocation veers away by more than 5% in either direction
Estate Planning
- Ensure joint account and nominee for all financial instruments
- Create Will for self and spouse. Encourage parents to create Will.
- Create Trust if you have large asset or special need dependents
Risk Management and Estate Planning needs to be done yesterday. Stay the course for Goal-based Financial Planning.
The writer is a SEBI Registered Adviser and Founder of FinMyn (https://finmyn.com). He provides Fee-Only Financial Planning and Investment Advisory services.
To know more about him, click on https://finmyn.com/about/.