An Elegant (Personal) Financial Plan

[been there]

I see that many of us are knowledgeable on many things in life like music, movies and shopping. When it comes to managing finances, not many have an idea of even the most fundamental of the rules.

I am salaried and wanted to know how best to manage my salary. So I spent a considerable time going through a good amount of material to understand the ideas of financial planning. Here are my learnings about managing and growing the money that we get each month. See if you can benefit from these.

1. Make sure the total monthly expenses are less than the income
2. Get adequate insurance cover
3. Set funds aside for unemployment for a limited duration
4. Have a methodical investment plan with a proportional allocation to debt and equity
5. Periodically revisit your financial plan

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For the interested, I mentioned a few formulae that can help you with your planning.

Income = (1/4 expenses + 3/4 savings) <= range <= (3/4 expenses + 1/4 savings)

Life insurance = Monthly income * 24 <= term coverage range <= Monthly income * 60
(Prefer term insurance to other types)

Annual medical insurance = 1 * major illness cost <= coverage <= 2 * major illness cost
(Prefer group medical insurance such as company plans)

Unemployment fund = Monthly expenses * 6 <= Reserves <= monthly expense * 12

Investment allocation = Present age % for debt + Unemployment fund + 10% gold + Remaining for equity

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Some terms and their meaning

Term Insurance A type of insurance plan where death benefit is provided for the duration of the plan; involves no returns on maturity

Debt A type of investment option where the returns are assured for a duration and the capital is not diminished

Equity A type of investment option where the returns are not assured and has a risk of capital erosion

 

[been there]

For the new bees, a good investment plan (item 4 above) is an essential part of your financial plan. Be it a systemic investment plan or a simple fixed deposit, putting your savings to work is very important.

You could drown yourself out in the options available in the market to invest these days. All of these are based on a very simple law, the time value of money.

The first thing for you to know is what the taxman can do to you. You pay tax on your salary, and so does the company. You pay tax for groceries, and so does the store. Any investment planning should begin with investment in the tax shelters for the applicable bracket.

The next thing you should know is what inflation can do to you. Inflation reduces the purchasing power of your money. And it tends to be misunderstood a lot.

If you have a fixed deposit for 8% and the current inflation is 9%, you are actually loosing money on your fd. Get an idea of howto invest and beat the inflation.

Then you have options in debt investment such as postal, government bonds etc. Generally, you must invest in debt a percentage at least equal to your age.

And then we have equity options such as mutual funds, stocks, ETF, etc. What is important for you to know is that you cannot outplay the market. The safest bet is a mutual fund, but with over a thousand options to choose from, it might get a little overwhelming. But your effort is worth the returns. A good mutual fund doubles your money in 3-5 years.

And since India is such an overweight market and since we are so corrupt, it is always a good idea to have a counter balance such as gold. Generally, gold moves in opposite direction to oil and dollar, also called as negative index. So that can be your safe bet when the whole market crashes.

And finally, have patience. In the game of money, it's time that makes your tiny seed grow to a large tree.

 

[Akash]

Very informative thread been_there. I was actually looking for something like this. I must admit that i am a noob when it comes to the understanding of investments. As a matter of fact, i will be joining my first job soon and want to make sure that i have the knowledge on how to manage my money efficiently. I am quite familiar with the FD procedures and would really appreciate if you put in some tips on stock trading and MF investments.

 

[been there]

Hey akash, here is what you want to know:

if you are new to equity, equity diversified mutual funds (mf) are the best and the safest option. Whe choosing an mf, consider past performance. No mf can be top 1 consistently, but there are some that are always in the top10/25 range. Go to Money Control to know more about these things. Always remember that the eggs do take time to hatch.

You might want to compare their NAVs, returns both absolute and annualized over a period of time, age of a fund, total fund size, etc.

Stock market Is a completely different ball game altogether. You need to buy low and sell high. You can trade by yourself online these days with any of the good banks.

You must be a young man (since you mentioned that it would be your first job), so there is time for you before you have enough capital to play in stocks. What I recommend is for you to know is your tax shelters and your insurance needs.

 

[kristalpaul8219]

I am looking to invest some money in stocks and bonds but I have only little information about financial details of a company. Any reference for an advisor or planner in Scranton city which can help me in my investment - independent financial advisors

 

[Iron Rock]

Excellent thread, i was myself looking to create something along similar lines for a while, i am sure there are quite a few of us who dabble in equities etc, would be good to hear some predictions from the Jhunjunwala's in TAI as well

 

[rsrs_in]

Few thoughts around which I having been working for sometime and have been decently successful. Key is patience for such an approach

- Avoid direct equities or derivatives till you dont have a surplus (over all liability) of say 1 cr - even then limit to blue chip companies
- Avoid insurance plans around the unit linked funds and stick to term cover from say LIC or others if you deem to have a signficant leverage already
- Avoid leverage i.e. taking loan for buying car, bike etc., unless its absolutely important. Its better to retain the leverage for housing loan
- Invest in debt like FDs, RD etc., to start building your corpus - size of amount does not matter
- Open a PPF a/c as soon as possible in your age and deposit full eligibility each year
- Review and invest in real estate (flats are best) and it does not matter small or big flat. Invest in ready possession by default and under construction only if there is signficant benefits.
- Rental income is one of the only sources that keeps track with inflation. It does not help to compare the return on the capital invested against the rental for the flat as the return will be higher, but over long period the capital appreciation will be much higher.
- Foreclose you housing loan as early as possible and on priority so that the interest does not eat up your potential capital appreciation

The key buckets for one to fill can be tracked as -

- Retirement corpus
- Child Education/Marriage - (for the socially/family obligated)
- Investment corpus - this is the fund you build as a base to start your investment for growth and this should feed into all other buckets
- Ongoing corpus - this is your kitty to meet all your expenses around vehicle, foreign trips, hobbies etc.