Retirement Planning – We may have reached our goals of owning a car or enjoying foreign vacations. But when we have retired and don’t have any stable income, how are we supposed to maintain this lifestyle? Retirement Planning helps us to invest well in advance considering the amount we wish to receive in future.
Inflation is the biggest wealth killer if we don’t plan our retirement considering the Inflation impact on the same.
Related Article: Start Early To Retire Early – Retirement Planning
Also, the markets are always subject to risk. Now we do see a visible impact on the economy due to pandemic, which has resulted in job loss, lesser production and lesser disposable income.
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Financial planning in 2021 – The year 2020 was one of such nightmares which many of us would definitely like to forget at all costs. Nevertheless, this year also taught us a lot about many aspects of life which we almost pay no attention to. In all, with the announcement of the vaccination drive for COVID-19, the year 2021 has rung a bell and has shown us a ray of hope in the gloomy times.
But has everyone learned the lesson for good from the year 2020 and has started acting upon it. New year resolutions have not gone stale yet and we would like to remind you as to how you can make the year 2021 the best year.
As we have steered ahead in Unlock 2.0, now slowly the finances, economy, employment markets, stock markets are beaming up. But until and unless you understand how to carry out financial planning for this new year 2021, you won’t be able to achieve much this year too.
So, let’s learn some quick tips for financial planning for 2021:
- Make financial resolutions for 2021 and stick to it
New year resolutions are really fun and motivating, but how to ensure that we stick to those? Try to mix consistency in your daily routine and reap the benefits of a loyal disciple of your own resolutions.
You could build a budget which may be designed to help you achieve some goals which may be
- Tax saving
- Retirement planning
- Vacation planning
- Emergency fund arrangements
- Wealth building for the long term
- Cutting back on unnecessary spending and shopping etc.
The list is exhaustive but it is always recommended that you should build a financial budget to ensure that at least 3 of your financial goals are achieved. Sticking to the budget is very easy and there are also some tools and apps available for your convenience.
- Tax Planning
Most people usually interpret tax planning as last-minute investments into anything which will suffice the deduction limit. However, there is much more to tax planning. Not all tax-saving instruments are made up to suit everyone’s risk appetite and investment goals. Let’s take the example of Mr. A who needs to invest in tax-saving instruments. Mr. A also wants to make most of it even where he is ready to accept moderate risk. Mr. A should invest in ELSS – Mutual Funds (blue chip or large-cap typically), which would allow him to claim deduction under section 80C. One more advantage is that Mr. A will be able to earn around 12-13% with moderate market risk.
- Investment Goals
If there is no goal, then there could be no financial planning. Ideally, financial planning would be divided into 3 types of goals
- Short Term Goals
Tax planning or contingency fund planning is usually the short-term financial goal. Short Term goals cover the time period of 1-3 years. The investments with a lock-in of 3 years period or investments with maturity for such a short period would be suited to meet certain annual cash flow or expenditure. A most suitable example of such expenditure would be insurance payments or school fees payment etc.
- Medium Term goals
A most appropriate example of a medium-term goal would be buying a house or school fees till graduation. Vacation planning can also be carried out in the medium term.
- Long Term Goals
Retirement planning would be peculiar examples of Long term financial planning. Investments having longer payment periods or with maturity/redemption expected at a much later date than 10 years would mostly be suitable. Equity investments would be also suitable for long-term financial planning.
- Medical Insurance
With COVID 19 in the background of the year 2020, the upcoming year 2021 would also be witnessing some ups and downs in the health security area. Following points to ensure that you are on the safe line.
- Revisiting the medical insurance coverage
- Check whether the current insurance cover is sufficient to cover hospital admission, room rent, etc.
- Check whether the medical insurance covers the major and terminal diseases
- Understand that it is better to pay the premium now and reduce the bigger cashflow at the time of the actual incident.
- Take care of your health
The year 2020 was a lightening effect to make us understand the benefits of good health. If you have good immunity, then you can definitely save yourself from multiple diseases and in turn much of your money too.
Subscribe to the Yoga class, take admission to Gym, take out time for a healthy jog. Break the routine of Work from Home and try to get out for fresh air. This will reduce mental stress and as well as add to the health benefits.
- Revisit the retirement plan
With COVID 19, many of us saw the actual job loss and pay cuts. This shows how critical it is to ensure that we revisit our retirement planning. While you assess the retirement plan, here are few things to check on
- Inflation factor
- Increased expected medical expenditure
- Reduced pay or no income in some cases
- Liquidity crunch etc.
- Create an Emergency fund
It is a known fact that a fund equal to six months of your income should be maintained as a liquid investment so that it could be used in the event of no active income source. Ideally, an emergency fund can be created by investing in short-term fixed deposits or recurring deposits, or mutual funds.
- Learn something
Learn something new which will help you either in getting-
- an increment in the current job or
- a new job or
- promotion etc.
This new skill may also help you add an additional income stream which you could use as an emergency fund.
- Strengthen your credit score
Try to pay off loans with the highest interest rate first. Also, avoid buying things on credit cards. Once you default on loan repayments, it hampers your credit score badly. So always make sure that you are not defaulting on repayments.
- Say no to unnecessary investments and tips
Most of the investors usually go out and make investments based on insider tips or commission agents’ advice. Try to take the help of a professional if you can not do it yourself.
These 10 Tips will help you out in building a sustainable financial plan for the year 2021. These pillars will help strengthen financial health in the coming years. Having said so, just building a plan is not enough. You will need to ensure that you stick to the Financial Resolutions to make it work for you.
Early retirement with retirement planning is like that delicious looking wild fruit which everyone wants to taste but few actually have the guts to do so. Gone are the days when families were supported by just one earning member. Even children are engaging in part-time gigs off late. Given such a win-win scenario, families are having greater disposable income which they are skillfully diverting to various savings scheme making the idea of mid-career retirement an attainable reality.
In most cases, an early retirement signifies an abundance of time in taking up that childhood hobby which got buried under paperwork and presentations. It also serves as a refreshing escape from monotonous work routine of engaging in something we seldom enjoy from the core of our heart. However, the silver lining lies in the fact that when people use the early-retirement planning tool to escape from something, then they should realise that the circumstances are never the same and they might soon end up being frustrated with the calmness of the daily mundane life devoid of the hustle and bustle of corporate culture.
Build up a Plan; To sustain in a long run
- Some brave hearts who have retired after crossing the 50 peripheries have again engaged in semi-retirement work mode sooner or later. The main reason behind this is that they often fall short of their desired retirement corpus which is imperative in imparting a positive stimulus to the early retirement drill and maintaining tranquillity therein.
- In our today’s blog, we shall share with you some tips and tricks of “how to get the ball rolling in your favor with the early retirement planning & procedure?” The stepping stone lies in setting financial goals that might take up the form of loan closure, owning the dream home, and children’s education. Before dwindling over a selection of post-retirement hobbies and activities, one must become financially independent. Planning well in advance can go miles in building a healthy corpus through time savings. One must remember that the purchasing power of money diminishes with time and thus it is extremely crucial to create a corpus worth fifteen times our annual income to sustain the present standard of living.
Why start Early?
- Ideally one must start with retirement planning at his young age so as to realize the adequate corpus at his actual retirement age. After squaring off liabilities, you will need to gauge if the assets in hand are enough to suffice your retirement goals which will act as the sole source to fund all expenses post-retirement. Since modern medicine is increasing our lifespan, an average human being can be expected to outlive his predecessors by at least 15 years.
- Saving habit at the beginning of our career is a good choice to ensure a debt-free life and a sound financial situation. Savings need to be such that can help us in our long lifespan which also can bear the brunt of towering medical expenses as our hair follicles start turning grey. Having a sound insurance cover can act as a buffer during times of crisis.
- The asset mix is also a supporting pillar of the holistic financial planning scheme. We can choose between equity and debt based on our risk-taking capability and expected return. However, with age our risk appetite also changes, hence getting our portfolio reworked periodically can help maximize our returns.
- Every time we get a bonus, we have an extreme adrenaline rush on stocking up our closet. Financial advisors have termed this habit as “lifestyle creep.” It creates a blockage in the path of natural savings. Thus, this should be avoided as much as possible. Instead, a habit of taking follow-up of the current investments would enhance their productivity and hence the bonus amount.
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Retirement Planning through Equity markets, really? Sounds pretty much like you won’t be thinking is possible, right? But what if I tell you that Retirement Planning through ELSS is very much possible and optimal option.
Let’s see why you should plan for your retirement first.
Why there is a need for Retirement Planning?
We enjoy and spend as much as we can afford when we are earning in our youth. But what happens when we retire and we don’t have an active income source which would be accruing and can be used for settling the commitments?
Retirement Planning helps us deal in a financial sense with the Post retirement expenditure and Lifestyle requirements as mentioned below :
- To maintain the current standard of living even after retirement
- To manage the increased burden of medical expenditure
- To allocate and mark up funds arrangement for vacation planning
- To maintain independent financial health and plan for succession
What is ELSS?
ELSS refers to Equity Linked Savings Scheme which means the mutual funds which invest primarily in Equity or stock market.
- ELSS allocate their 80% funds towards stock markets or equity instruments
ELSS are actually called Equity Linked since most or all of the money of the investors is invested in shares and securities.
- ELSS have tax benefit on investment
This means that investors can opt for tax deduction under section 80C for the amount invested in ELSS. If you redeem the ELSS after the expiry of lock-in period, then the proceeds will also be exempt from Income tax if the gain is less than 1 lac. Otherwise 10% of gain needs to be paid as taxes.
- Lock-in Period of 3 years
Since ELSS are tax-saving instruments, they come with a lock-in period. Once you invest in ELSS, you block your money for 3 years at least if you wish to save on tax.
- ELSS earn more than your regular deposits
Bank deposits are yielding lower interest rates right now and the Stock Market is beaming high. Even where all the ups and downs are considered, a decent wealth-building plan would definitely earn you more than Fixed deposits.
Related Article : FD vs. ELSS – Where does Mr. Gupta invest and why?
- Invest in SIP or in Lumpsum
You can opt for SIP route where you will investing in ELSS monthly or you can invest aa single amount in a lump sum.
- ELSS does not provide stable returns
Having said that ELSS earn more, it is because of the fact that these are based on the dynamic stock market. ELSS will not provide you fixed income however, you can decide to invest in ELSS based on various parameters which can give you leverage over this risk.
How can ELSS and Retirement Planning go hand in hand?
- ELSS allows you to track the value and much more at any time
Investors can easily track the value of their investment and the NAV of their investments at any point in time when they opt for ELSS. This allows them to check whether their funds have underperformed or are at optimal levels.
- ELSS helps you switch to other funds too
If you are unhappy about the performance of ELSS then you can use the switch option to divert your fund to the most eligible option, subject to conditions. This is possible in the same AMC and only after the lock in period is over.
- ELSS are professionally managed
Investors having an urge to invest in stock markets due to its lucrative returns, often back off due to lack of knowledge. However, ELSS helps you deal with this insecurity since those are managed by the qualified and experienced Fund Managers
- ELSS are transparent
All information related to inception, their composition, fund managers, returns, other parameters etc. is always available on public domain w.r.t ELSS. So there is nothing which is hidden about the ELSS.
What should you consider while doing Retirement Planning through ELSS?
- Expense Ratio
Expenses ratio refers to the expenditure with respect to the administrative structure which also includes a fund manager’s salary. ELSS with lower expenses ratio will always earn more just because the actual return earned by the fund is little eaten off by the costs of the ELSS fund management.
- Benchmarking of performance
This is a tricky one since the ELSS performance should always be compared with
- Its own historical performance
- And peer performance
These two criteria will always allow the investor to filter out the best ones.
- ELSS has dual advantages of tax saving and wealth building
ELSS are a very optimal investment option considering that it allows you to reap tax benefits as well as helps in wealth building. If you select an appropriate ELSS then you are sure to get inflation factored returns.
- AUM (Assets Under Management) and their composition
This data is always available on the public domain, so it is advisable that one should check these before investing in the same. Higher the size of AUM, greater are the chances of higher returns on the same.
Even with all these, ELSS is the most favourite tax saving instrument and can also be used as a tool for Retirement Planning. However, you will always need to check the corpus of retirement funds, desired ROI, Inflation rate impact and tax benefits. And once you are done with the evaluation, you should always jump in at the right moment to start earning early with ELSS.
Mr. Sharma seemed quite tense while having a morning walk, which was either his work stress or retirement or something else maybe. I tried confronting on the same; “Hey Buddy, you look worried. Is there something you wish to share with me?” “Oh yes! I am not quite sure how to share my concern. But I can talk to you as a friend and maybe you can advise me as my Financial Planner.” Mr. Sharma and we both share a professional relationship.
Then he went on about his concern about retirement planning and also was unsure about COVID’s impact on retirement planning. He is a private sector employee earning decent earnings but the uncertainty and panic clouded his mind about his retirement planning with COVID on rising.
“I have worked for almost 15 years for XYZ Ltd. and would be willing to continue for 5 more years. But with this COVID 19 impact on the global economy, I am not sure whether I would be able to survive the market.”
It is indeed true that these are uncertain times and we should strive to look for any fallback alternative. I assured him to help on Retirement Planning considering COVID 19 Impact.
Let’s see why Mr Sharma is worried about his Retirement Planning even when he is still investing and try to come up with a suitable retirement planning.
Why is that you should do the Retirement Planning? There are two basic reasons:
- To maintain the current lifestyle
We may have reached our goals of owning a car or enjoying foreign vacations. But when we have retired and don’t have any stable income, how are we supposed to maintain this lifestyle? Retirement Planning helps us to invest well in advance considering the amount we wish to receive in future.
Related Article – Financial Planning – Tips For Every Generation
- Inflation factoring and other relevant disruptions
Inflation is the biggest wealth killer if we don’t plan our retirement considering the Inflation impact on the same. Also, the markets are always subject to risk. Now we do see a visible impact on the economy due to pandemic, which has resulted in job loss, lesser production and lesser disposable income.
How COVID 19 has impacted Retirement Planning?
- Job loss or pay cuts
Covid 19 has affected the Job markets since lockdown resulted in shutting off of various businesses like hotel businesses, schools, colleges, Gyms etc.
A very huge section has suffered business losses or has suffered pay cuts or have lost their jobs, leading to lesser cash flows towards retirement planning.
- Increased medical and sanitization expenditure
Most of the businesses are trying to keep up with Unlock, however, the increased burden of the sanitization and medical expenditure (medical insurance) has again impacted the disposable income.
- Impact of Moratorium and loan restructuring
The government had declared Moratorium for all types of loans, however, with Unlock 1 and 2, banks are also expecting a payback. It is unsure how they would restructure the loan considering the EMI deferred in the Lockdown period.
- Stock markets uncertainty
Stock markets kept tumbling due to stress caused by COVID 19 induced Lockdown. However, again the markets started to surge with Unlock 1 and 2, leaving the retail investors in awe. This has created a what-if question in the investor’s mind.
How Mr Sharma Plan his retirement in the wake of COVID 19 impact in the Retirement Planning?
- Mr Sharma should try to defer retirement or try to earn some extra income in case of pay cuts
Mr Sharma was thinking of early retirement with a small business set up within the coming 5 years in a Pre-COVID setup. However, COVID 19 impact is yet to subside and it would be better if he could postpone his retirement by at least 5 more years to compensate deficit income.
He could as well try to look at some simultaneous earnings options if he could manage the same. This will help him balance his Corpus investment in retirement Planning even in COVID 19 scenario.
- Mr Sharma should reassess his Risk Appetite and Investment threshold
With the increased medical premium for COVID cover and sanitization expenditure, Mr Sharma needs to revisit his existing investment plan towards Retirement Planning. The interest rate of bank deposits have soared low and markets are beaming due to news of COVID vaccine.
However, it would be pertinent to assess whether he could take the risk to invest in markets or mutual funds at this juncture.
Related Article – 6 Retirement Planning Mistakes To Avoid – Fintoo Blog
- In no case, the contingency funds are to be touched
Every family maintains a contingency fund which might be in the form of Fixed Deposits, Gold or some government securities. Mr Sharma should not divert these emergency funds towards allocating his retirement planning.
- Mr Sharma will need to reduce unnecessary expenditure
Dining outside or multiple OTT platform subscriptions were okay in Pre-COVID scenario. However, Mr Sharma should cut down on all unnecessary expenditure which would burden his investment portion.
When there is cut back on the expenditure, Mr Sharma could easily tap the usually drained out funds which could be easily allocated to Retirement Planning.
- Mr Sharma shall think of loan restructuring
RBI had come up with the facility of deferring the EMI payments for a certain period of time considering the COVID impact. Now, the interest rates have soared much on all loans. This calls for loan restructuring and the deficit in retirement planning would be filled in with the money so saved in interest.
- Never put all eggs in one basket
Once Mr Sharma is done with Risk profile assessment, he can think of diversified investment towards retirement planning. It is a seen and verified fact that bank interest rates are diving lower and markets are shining.
If emergency funds are already invested in safe instruments, then Mr Sharma should think of setting aside funds and investing in Mutual Funds and Stocks. The COVID cover is also necessary until vaccination materializes. This will cover the financial health as well as will not hamper the Retirement planning aspect too.
Let us begin with two different situations. First of all, all of us would like to enjoy free time without any professional duties aching us. It is needless to say that having such unperturbed leisurely time free of professional worries requires a solid financial standing.
Now consider the second situation. After reaching 60 some people still wish to go on working for few more years just because their savings is not enough to meet the cost of living. Moreover, we all know the financial insecurity associated with old age.
So, on the one hand we have the dream of living an unconcerned, happy life free of professional and financial worries and on the other hand, we have all the worries, insecurities and instability of old age post-retirement days.
Now, let us ask you straight, which of these two situations do you want to fit in? Or, better to ask you more precisely, which situation fits your financial reality best? Did you assess your financial condition and the possible outcome of this in detail? If not, this is high time to have a complete assessment of your present situation and the days ahead.
While the first situation irrevocably calls for an early financial planning and early retirement, the second refers to a condition where a person finds himself in a difficult situation after retirement without really having anything to back him up.
So, financial planning is necessary to avoid finding yourself in a nightmare of insecurities in your old age. On the other hand financial planning is necessary not only to ensure solvent and sound financial condition in the post-retirement years of life but also to fulfill the dream of early retirement.
How financial planning ensure a life free of worries, insecurity and instability? First of all, you need to start planning early in your life when you are still young. Let us offer here a few tips for financial planning at young age to make your post-retirement days brighter.
- Begin Retirement As Early As Your 1st Job
Earlier you begin saving and investing, bigger the sum you can ensure at the time of your retirement. Moreover, starting early with various investment options is double beneficial since you can easily gain expertise by having better exposure. If you are an employee, make bigger contributions to your provident fund and if you are self employed make a voluntary contribution on a regular basis on any systematic investment option including PPF, SIP, etc.
- Consider Value In Every Financial Decision
Young people are less considerate about the value of money and naturally they end up spending a lot on clothes, gadgets, lifestyle and vacations. Well, enjoying life is fine as long as you can ensure the same for your later years. When you think of your later years in the post-retirement period, the grim future of uncertainty will push you to consider the value of money in a new light. Instead of spending lavishly, hold on to some principles and make better judgment and better bargain.
- Maintain A Distance From Credit Card
Young people are highest spenders on credit cards. To make their lifestyle dream come true and to grab the things they always wanted they do not mind spending on their credit cards and taking the burden of credits on their shoulders. This ultimately results in a debt ridden scenario far from financial solvency. This actually takes one towards the opposite direction of financial freedom. If you want to start planning your financial condition with a positive note, just use credit cards only sparingly and only in unavoidable necessities.
- A Liquid Reserve To Meet Contingency
This is probably the most important step for financial planning. You cannot meet the contingent situations if you do not have a prior planning. In case of abject needs from where you can quickly fetch funds? Do you have a reserve of liquid asset to meet such contingency? If not, it is time to prepare for one. It is said by experts that one must have a liquid corpus of at least 6 times of the average monthly income.
- Insure Your Family
What our happiness amounts to if we cannot just ensure the same for our family? This is particularly true in case of any sudden mishappening or accidental situations. In case the earning member of the family dies or becomes disabled all of a sudden just due to any accident or illness, the dependent family should have the decent financial arrangement to look after their expenses and lifestyle. Unquestionably, there is not a better tool than insurance for this arrangement. This is why insurance is one of the most crucial parts of financial planning.
- Take Calculated Risk
When you are young, you have long years to achieve growth overcoming the ups and downs in volatile market based investments like equity, mutual funds, etc. This offers you a great opportunity to make your money grow and achieve large sum over a longer period. So, when you diversify your investment you should have a considerable portion invested in market based instruments like equity and mutual funds.
- Choose Financial Planning Instruments That Suit You
Finally, every person has his own financial objectives, types of financial constraints and ambitions. Naturally, choosing your financial planning instruments will also vary accordingly. You need to choose a financial plan that suits you best. It also depends on various factors like your age, professional exposure, job security, volatility of income, financial responsibilities and burden, available provisions for making savings for retirement with contributions from employers, etc.
Are you still at your late twenties and earning a decent salary with no such financial responsibility on your shoulder? Well, you can literally go all out with a robust growth driven plan. Are you in your late thirties or early forties with a good income and a family to look after? Well, you need to take cautious steps in regard to risks and can diversify your investment in several instruments to achieve the right balance of growth and security.
Most of the people are unaware of certain basic things or factors to look out for, which are basically warnings towards incoming financial peril. If ignored these may prove to be very costly, but if identified at early stage, they may be corrected to ensure sound financial health and leads the way to efficient and effective financial planning. Let’s see the top 7 signs indicating the need for financial health check up.
Liquidity check for emergency situations
Imagine a situation where you are suddenly face job cut or meet with an accident which will disrupt your income earning capabilities. Most of the people are experiencing the job loss or pay cut currently owing to COVID-19. You can’t predict such events or developments since they are very much unpredictable. You can check your liquidity position by calculating the liquidity ratio as below.
Cash or most liquid assets (include fixed deposits and equity or ETFs)
Regular household expenses incurred or estimated per month
This ratio will give out the time period for which you have surplus funds on which you can sustain without any income during such period. This is the additional liquid funds which are actually your emergency buffer, which should ideally be not less than 3. If you have liquidity ratio of 1-1.5, then there lies times of trouble ahead.
Also, if you have equity investments done specifically for a goal like children education then do not count that amount in this calculation as you should not ideally consider this for meeting emergencies.
Loans without reciprocal asset creation
Credit card loans or EMIs for luxury (simply put unnecessary items) are just an example of unwarranted loans, which do not lead to any asset creation in the long run. So forget about that high end smartphone which will put a hole in your pocket (almost equaling a month’s grocery) and put your finances to use. You can assess your debt position with following ratio.
Total liabilities (loans)
Loans would include long term loans and short term loans like credit card loans etc. Ideally for a person in the age group of 25- 45 years, has higher ratio due to higher long term loans leading to long term asset creation. However, if you are having ratio below 1 or more than 2, then it is time to check and reorganize your borrowers position.
Check the savings ratio
Financial planning starts and ends with savings. Savings should ideally be any amount saved, invested or any surplus earned every month. Any person would be better off with higher savings ratio which can be calculated as below.
Surplus generated or disposable income
Income for every month
If you are encountering ratio below 1, then this is warning sign. It indicates that you are not saving, rather you are spending more. Even ratio more than 2 also indicates that you are borrowing and saving that money (works out only if interest payable is lesser than the interest income on the investment).
Assess where you stand
If you are the person who has already a huge burden of the debt and is responsible for paying up a fixed amount as loan repayment, should assess his liquidity and solvency position. This can be calculated as below.
Monthly predetermined Long term and short term debt repayment commitments
Income earned per month
You need not worry if your ratio is less than 1, rather it indicates effective debt management. However, those of you having ratio of more than 1, have to take a corrective action, as this ratio implies that you have borrowed way over the extent to which you can actually afford to pay off the liability.
Those of you, who have started retirement planning, may well be ahead of all others, may be able to enjoy the power of compounding. This will not only enhance the retirement corpus for you, but will also ensure that you will achieve it within your time frame, even where your cost of investment is much lower due to early entry as compared to others.
Amount contributed towards retirement planning
Total income earned
Ratio of 5-7% indicates that you are contributing to satisfy threshold for tax saving instruments only, while ratio of more than 10% indicates that you are aiming at building up the retirement corpus for early retirement. However, any ratio below 5% would need reconsideration of financial planning, which would maximize the retirement contribution to optimal levels.
Impulse purchases or exceptional spending behavior
Why is that, every time you go to a mall, you need to buy a dress which will make you regret you afterwards (in terms of cost of course!)? Why is that you can’t resist ordering pizza often which is almost equal to two weeks of grocery payment? These are sheer impulse or unnecessary items, which you buy out of sheer laziness or in the heat of the moment.
Impulse / exceptional purchases
Income earned per month
If you are below 5%, then no reason to worry, because your finances can still handle it (but you will need to prevent such impulse shopping). However, those of you landing in double digit ratio, are in deep trouble. This indicates that impulse purchases have rather become your habit and you are giving in to the temptations, which will land you in a situation, where you won’t have enough to pay for the things you need, because you have already spent on things you don’t need.
What is your worth?
Well not you, but your financial assets and investments! Ideally, positive ratio would bring out the extra-ordinary situation, which proves that your net worth is increasing and you will be achieving your financial goals well before the time frame.
Where net worth = total assets (includes short term and long term assets) – total liabilities (both short term and long term). So, this net worth may keep on changing every month, depending upon the commitments. However, if you find out that this ratio is consistently negative for more than 1-2 months, then it’s a warning bell which will suggest that, you have borrowed way more than you can afford to pay off later.
Financial planning is a discretionary and yet quite typical procedure, which is ongoing and needs to consider holistic approach. Above seven indicators will give you outline that it is not just about the saving or about investment. However, you need to evaluate, analyze and put up any corrective and preventive measures, for any aspect of the financial planning.
The wealth earned by us is indeed determined by the quality of our health. The increasing medical costs makes it extremely difficult to sustain the corpus acquired by us throughout our life if we do not make adequate planning for health insurance. This is why financial planners focus on the importance of health insurance in retaining the viability of your long run financial goal. For benefitting out of the same, you will have to select the right health insurance plan which can last throughout your retirement life and hike up the value of your financial plan.
Importance Of Having Medical Insurance In Place
All of us yearn for a secure future both in terms of financial and health-related matters. A medical expense might seem manageable in your 30s with a regular income source for adding to your corpus. But the entire story changes once you enter the golden age of your life. With limited or even nil income sources, you need to bank on your earlier saved corpus to mitigate the rising medical costs. This is why it always pays to have health insurance in the first place.
Medical emergencies do not come with a prior warning. It also has a tendency of increasing with every passing day. Keeping such things in mind, it pays to have a health insurance policy in place. You can ensure the same by ear marking a certain portion of your savings to pay the premium starting today itself. A sound health insurance policy can assist you in handling all unannounced health expenses in a smooth fashion without causing a dent in your regular finances.
Purchasing a health insurance plan and aligning the same with your financial goals can be of great assistance in shielding you from unannounced medical expenses that can arise during your golden years. With a limited income source, it becomes extremely difficult to cater to the same. This is where a health insurance policy comes in as a complete blessing by providing for treatment expenses and hospitalization charges. Some of the policies also offer comprehensive plans to cater to a more versatile set of requirements.
Let’s see health insurance benefits in detail:-
Health insurance plans also serve as an important tax saving tool. An assessee can claim deduction under section 80D on the premium paid by him for securing the health of his family and parents. This deduction can be claimed as follows:
- For Self & Family – Maximum deduction of 25000 INR per annum on health insurance for self and family. Maximum deduction of 50,000 INR per annum if you are a senior citizen.
- For Parents -Maximum deduction of 25,000 INR per annum on health insurance premium paid on behalf of parents. Maximum deduction of 50,000 INR per annum on premium payments incurred for senior citizen parents.
- A deduction of 5000 INR can be claimed per annum on health check-up related expenses. This is applicable to all the family members of the taxpayer including his/her spouse, children and parents. This deduction is part of 25000/50000 as the case may be.
It takes years of hard work to gather adequate corpus which can bring you in line with your ultimate retirement goal. However, a sudden medical emergency can squeeze out all your hard-earned funds at one go. Nothing matches up to the importance of human life and that is why we try our level best to provide ourselves and our loved ones with the best of medical treatment.
Having a medical insurance policy can guard your back in such a case by preparing you to face all sorts of emergencies without worrying about the financial setback caused by the same. However, this is possible only when you opt for a health insurance policy which has adequate cover size and tenure to render protection against all sorts of illnesses.
Real Life Examples
Let us take the example of a middle-aged man in his 30s who falls ill and has to spend 10 lakh INR on treating his illness. He does not hold a health insurance plan and finances his expenses partly from his savings and partly by taking a loan. Once he recovers from the illness, he needs to start paying back his bank debt. This will be followed by saving money to primarily meet the earlier gap in savings for fulfillment of his ultimate financial goals.
Had he taken a health insurance policy which could cover his entire medical costs, then he wouldn’t have had to face such a scenario in the first place. The premium for gaining coverage worth 10 lakh INR would have varied somewhere between 10000-15000 INR per annum approximately. He could have even got a family floater policy covering two adults and two children by shelling out a little more yearly. Spending this nominal amount could have buffered him in times of medical emergency without derailing him from his ultimate financial objective.
Read More :- 6 Retirement Planning Mistakes To Avoid
Health insurance comprises the lion’s share of retirement planning and it is time individual investors understand the same. Increasing medical expenses and future uncertainty is making it mandatory to have a medical insurance plan in place for buffering you from further troubles.
It is also necessary to maintain good physical and mental health in order to attain your ultimate financial goals. This is why financial advisors advocate these medical insurance plans to individual investors from a very early age so that they can gain more coverage by shelling out a relatively smaller premium.
Disciplined financial planning serves as the prerequisite of leading a financially secured retirement life. However, this hardly gets followed in most of the cases. Although retirement planning sounds a bit scary and confusing to most people, this anxiety can be entirely removed by avoiding the most common retirement planning mistakes committed by people. Today we are going to take a look at the biggest retirement planning blunders so that you can be well-braced while deciding on your retirement plan.
- Starting Late
Instances are not rare when people start planning for their retirement after reaching their 40s. However, at such a stage they also have other things to take care of like children, elderly parents, paying for a home loan and even maintaining a certain standard of living. Staring early in the track of retirement planning can provide you with more time to ensure the proper growth of your investments which in turn leads to greater corpus accumulation.
A 35-year-old planning to accumulate a retirement corpus of 1.5 crore INR needs to opt for a monthly SIP of 8000 INR at 12% annual returns. Whereas a 25-year-old would just need to invest 2300 INR in monthly SIP for attaining the same corpus. Thus, you can very well understand that starting early is not just a choice, it’s an absolute must.
- Inadequate Health Coverage
Growing age is synonymous with increasing medical expenses making it vital to opt for an adequate health cover which can cater to the sudden requirements you might face during the golden years of your life. Failure in procuring an optimum health cover meant for your post retirement phase can cause you to lose a major chunk of the retirement corpus in treating unforeseen medical expenses.
In many cases, employers provide group health policies but they remain active only till the time of employment. This is why it becomes imperative to opt for an adequate health insurance plan early and keep on renewing the same with timely payment of premium. Insurance companies usually extend their coverage up to 65-70 years in many cases and advise thorough medical check-ups once you cross over the age barrier of 55. It becomes imperative to opt for health coverage prior to the same and keep on increasing it on a yearly basis for catering to all medical costs.
- Overlooking Inflation Metrics
We often make the mistake of calculating our retirement corpus based on our current income and price level. Our income keeps on increasing till the date of retirement to keep in sync with the growing cost of living. However, the amount retirement corpus remains fixed based on certain decisions we take during the early stages of our life.
Inflation has a tendency of decreasing the purchasing power of money over time and hence it is necessary to consider the same while getting the retirement planning done. You can consider the expected and current inflation rate at the time of calculating your retirement corpus. Various online retirement calculators are available to assist you with the same on a monthly basis so that your accumulated corpus can easily sustain the wrath of inflation.
- Buying More Policies Than Actual Requirement
Several people end up buying around 14 to 15 insurance policies to safeguard them during retirement. But in reality, being a policy collector will not make things easier in your golden age. As an alternative, you need to learn in detail about the concept of life insurance and get a term life cover. This cover can be enough for taking care of the financial expenses of your dependants unless someone else in the family starts earning.
- Sporadic Reviewing Of Retirement Plan
A retirement plan might not be of much help if it is not reviewed and implemented properly. It is definitely not a one time activity given the long time span of the goal. In reality, changing times require changes in the plan and hence sticking to one single plan can result in faltered output. All major life events be it marriage, childbirth, taking a home loan or sending children abroad for education significantly affects your savings pattern making it mandatory to alter the investment strategy.
- Inappropriate Asset Distribution
Asset allocation has an extremely important role in deciding on the type of investment which can serve you in post-retirement stage. Asset distribution usually concerns the allocation of funds amongst different investment tools like bonds, stocks, real estate etc. Your individual needs and financial standing can significantly affect your asset allocation. Various factors like changing lifestyle, decreasing income and risk taking ability also alter significantly with increasing age.
Younger people having high risk bearing capability are usually advised to opt for equity investments as they can provide higher returns and are perfect for the long-term horizon. Your asset allocation needs to be periodically revisited for ensuring that it is appropriately aligned with your end goals. Acting otherwise might leave you with insufficient corpus which might not be able to beat the rising inflation metrics.
Read More :- Impact of COVID-19 on your Retirement Planning
The spread of financial literacy amongst Indian people have made them conscious about the requirement of retirement planning from an early age. Maybe this is why it is not rare to come across job fresher’s belonging to the 20 something age category seeking the assistance of financial experts in planning the golden days of their life.
With more and more youngsters opting to work under the private sector, a proper retirement planning is slowly turning into the need of the hour. Job insecurity and lack of government pension can be sighted as the biggest causes of the same. But if you are aware of the mistakes lined out above, then you can definitely attain your retirement goals in due course and with minimal obstacles.Download Minty app App store & Play store and chat with experts and know the best retirement planning strategies.
Emergency Fund as the word itself says it is a fund which can be utilised in case of an emergency. Emergency can come anytime. You will not know in advance what unforeseen event is going to knock on your door. It could be a job loss or medical emergency with any family member or yourself. In the worst case it could be an unexpected demise of an earning member in the family.
The interesting thing about emergencies is that you cannot predict what will come and when. For instance, nobody would have ever imagined the emergence of a highly contagious and deadly disease all over the world and that it would spread exponentially affecting global economies. The impact is not limited to health but also wealth. People are losing their job or experiencing substantial pay cuts or leave without pay. In such a situation, we realise how important it is for everyone to keep an Emergency Fund. It will help you to manage your expenses without borrowing or affecting your other ongoing investments.
Now that we realise the importance of having an Emergency Fund, let’s understand where we should invest this money.
The two most important factors to be considered while making an investment for emergency fund are –
1. Liquidity – One of the most crucial things is that this money should be readily available. Whenever you need, you should be able to encash it immediately. This means that you cannot invest this money in a PPF account or real estate. Because when you will need it, you will not be able to encash it because of no or low liquidity in these options. Therefore, look out for highly liquid assets.
2. Low Risk – The second most important thing is that this money should be invested in a low risk asset class. It implies that you should not be investing this money in the share market. Although the share market is highly liquid, the volatility is also very high. We would not want to withdraw from such investments by booking losses. You should know that equity market investment is for the long term and is highly volatile. So there might be a situation where you need money but the market is down so you will be forced to withdraw at a loss. This is happening currently with investors who don’t have any emergency corpus.
So based on these two factors, what are the options available to us?
1. Saving Bank Account
Many people prefer to keep emergency funds in their savings bank account. No doubt, it is highly liquid but it gives hardly any returns. Currently, the saving bank accounts are offering 3-5% p.a. which is not even covering the inflation cost. So it’s not a good decision to keep your entire money in a savings bank account.
2. Fixed Deposit
A fixed deposit (FD) is a financial instrument provided by banks, that provides investors with a higher rate of interest than a regular savings account, until the given maturity date. The defining criteria for a fixed deposit are that the money cannot be withdrawn from the FD.
The level of liquidity is low. But you have the option to withdraw with the penalty. To compensate for the low liquidity, FDs offer higher rates of interest than savings accounts.
3. Liquid Mutual Funds
A liquid fund is a type of mutual fund which invests primarily in money market instruments, like treasury bills, commercial papers, certificate of deposits and term deposits. They allow Investors to park their funds for a few days or months as they have maturities up to 91 days.
Liquid funds can be made liquid at any time and earn returns for the holding period. Because they earn a return from market instruments, liquid fund’s returns can rise or fall depending on the market rates. For very short debt, Market interest depends on the liquidity situation.
Read More :- Importance of Continuing SIPs Amid COVID-19
Let us compare Liquid Mutual Funds with Fixed Deposits
1. Liquid funds are easily accessible as compared to bank FDs. Bank FDs would penalize you for premature withdrawal. Liquid funds do not have exit loads.
2. As per past records, liquid funds prove to give better returns than fixed deposits. It would range between 6% to 8% per annum. On the other hand, bank fixed deposits offer returns depending on the tenure. Lower the tenure, lower the interest rates.
3. Since liquid funds invest in short-term securities, it has lowest interest rate risks. When interest rates fall, bond prices go up. When interest rates rise, bond prices fall. The negative relation between bond prices and interest rates is stronger for long term bonds. This means that the longer the maturity of a bond, the more it responds to changes in market yields. Since a liquid fund invests only in short term securities, it’s market value does not respond much when interest rates change in the market.
4. Tax treatment: If you sell them before 3 years, any gain needs to be added to your income and you need to pay income tax based on your tax bracket. Fixed deposits are also taxed the same way even if it is more than 3 years. However, if you redeem liquid mutual funds after 3 years so will have to pay tax of 20% with indexation benefit. This will be fruitful for investors in the higher tax bracket.
If you want to park your money for a short term or immediate requirements, liquid funds would be the best bet for you. Consider the above factors before investing in such funds. Investors can choose good liquid mutual funds based on past years performance, low expense ratio, high Assets under Management (AUM) and well diversified portfolio.
So don’t wait any longer, create your emergency fund today by investing in Liquid Mutual funds. You can do this by downloading the Fintoo App.