One of the major reasons we fail to secure ourselves financially is because we are unaware of the things that should be done for it. We do what we feel is the right thing to do but that might not always be sufficient. Hence, it is essential to know what are the key components that you need to focus on while creating a road map for your financial well being.
In this blog we will talk about different aspects of personal finance to give an idea about how your complete financial picture should look like.
Before delving deeper into the topic, it is essential to point out that there are 5 contours to one’s complete financial picture. They are saving, investing, financial protection, tax planning, retirement planning, but in no particular order.
Here are the 5 aspects of a complete financial picture:
- Savings: You need to keep money aside as savings to cover any sudden financial need.
- Investing: Investing is important to grow money so that you can achieve what you aspire.
- Financial protection: Now, financial protection through insurance ensures you and your family are able to sail through during the hard times.
- Tax planning: With proper tax planning, i.e. making adequate expenditure/investment, you can bring down your taxable income, eventually saving a lot of money every year.
- Retirement planning: Finally, retirement planning is crucial to ensure that you have a big bank balance meant solely for your needs during the twilight years.
And now, we will discuss each of the 5 aspects in further detail:
#Number 1: Saving
The need for sudden money can come anytime. It can be as mundane as a car breakdown or as serious as losing your job. However, such emergency events can be dealt with if we have enough savings to cover the need. As a thumb rule, the fund for your emergency needs should be three to six month of your expenses.
Debt instruments like Liquid Funds are excellent options for parking the money meant for emergency needs. And the 3 reasons to back that thought:
- First, liquid funds give slightly better returns than your savings account, even though there is no guaranteed return.
- Second, these funds are highly liquid, hence you can withdraw the money after seven days.
- Third, they carry negligible credit and interest risk, and hence your money is safe.
#Number 2: Investing
We often confuse investing with saving, or consider them to be synonymous. While saving is about setting money aside, investing is putting money/purchasing assets like – stock, bond, mutual funds etc. – in order to make your money grow.
Now talking in terms of investment, mutual funds are an excellent investment option if it is done right. However, while investing in mutual funds it is essential to be mindful about choosing the right fund for your investment, otherwise it might turn counterproductive. Hence it is essential to make your investment as per your investment requirement and horizon.
So here the thumb rule is, turn your dreams into financial goals and set a timeframe around it. Then pick a mutual fund that matches your investment timeframe.
Now what funds should one pick as per their financial goals?
- Short term goals: The goals that need to be achieved within three years are short term goals. From saving for a trip to saving for a phone, there are multiple things for which one needs to arrange funds within this timeframe.
Best investment options: Liquid Funds, Ultra short-term funds.
- Mid-term goals: If you have set a goal for yourself that needs to be achieved within three to five years, for example downpayment for a house, it can be termed as mid term goals.
Best investment options: Hybrid Funds, ELSS, Short Term Debt funds like Banking and PSU Debt Funds
- Long term goals: Milestone events like retirement, children education, their marriage, i.e. the goals for which the timeframe is minimum of 5 years are termed as long term goals.
Best investment options: Multi Cap Funds, NPS (only for retirement), Large Cap Funds
|Financial goals, its timeframe and investment options|
|Financial Goal||Number of years||Investment option|
|Short-term goals||Up to three years||Liquid Funds, Ultra short-term funds.|
|Mid-term goals||Three -five years||Hybrid Funds, ELSS, Banking and PSU Debt Funds|
|Long-term goals||More than five years||Multi Cap Funds, NPS (only for retirement), Large Cap Funds|
#Number 3: Financial protection
We might weave several dreams in life and create investment plans to turn those dreams into reality. But unless we protect them with a safety net, the same can turn into a liability. That safety net is insurance.
There are 4 kinds of insurance we all need. And these are:
- Term insurance:
It is a kind of life insurance that ensures that your family or dependents do not have to go through financial hardship if you die early. As compared to other health insurance products, the sum assured for term insurance is higher as against the premium amount. Now if you calculate it correctly, then you can account for day-to-day expenses of your family, a retirement corpus for your spouse, cover for your liabilities like – home loan, and children’s education in the sum assured.
- Health insurance and Critical Illness insurance:
Having health insurance ensures that you do not have to pay from your pocket in case you or any of your family members have taken ill. Health insurance covers all costs for treatment of the insured like hospitalisation, medication, pre and post hospitalisation expenses etc.Meanwhile you can opt for critical insurance along with your basic health policy. In case you are diagnosed with one of the critical illnesses mentioned in your policy, the insurance company will pay you the sum assured.
- Mortgage Protection insurance:
Mortgage protection insurance pays off your mortgage if you die during the term of the mortgage. It ensures the loan or mortgage for home, car, property etc. does not become a liability for your family, in case you die early.
- Personal Accidental insurance:
In case you meet with an accident and get seriously injured, or become partially or fully injured, the insurance company will pay the sum assured to cover the expenses for treatment and also loss of income. Meanwhile, if you die during the accident, the lumpsum amount will be paid to your family. The payable amount, however, is dependent on the fatality of the accident.
#Number 4: Tax Saving
Though we are required to pay taxes as per tax slabs, with the right kind of investment/purchase we can reduce our taxable income to a certain extent. In fact, there are as many as 70 exemptions and deduction options through which we can bring down our taxable income.
Here are the 2 most popular sections for deducting taxes:
- Section 80C: The biggest pool for tax deduction is Section 80C. Under this section, you can claim deduction up to Rs 1.5 lakh for making various investments and expenditures. Some of the prominent tax saving instruments under this bucket are EPF, PPF, NSC, NPS, ULIPs, children’s tuition fee, life insurance premium, 5-year tax saving FD, ELSS, Senior Citizen tax saving instrument, Sukanya Smriddhi Yojana, home loan principal amount.
- Section 80D: Also, you can claim deduction under Section 80D, for the premium amount you pay for your and your family’s health insurance policy.
|Popular tax saving instruments|
|Section for deduction||Schemes|
|Section 80C||EPF, PPF, NSC, NPS, ULIP, LTA, children’s tuition fee, life insurance premium, 5-year tax saving FD, ELSS, Senior Citizen tax saving instrument, Sukanya Smriddhi Yojana, home loan principal amount|
|Section 80D||health insurance policy|
Apart from these two, there are other avenues to reduce your taxable income, to know about them read: Beyond Section 80C: 10 ways to save taxes.
#Number 5: Retirement planning:
Retirement is one of the most crucial life stages, and it can be as blissful or as miserable depending upon how you have planned for it. It holds true for financial planning too.
Now, planning finances for retirement is a two step process. First, is saving for retirement and second is, generating income from your assets during retirement.
And, here are the two steps –
- Step 1: Building a retirement corpus:Saving for retirement is crucial for two reasons majorly – loss of income and increased life expectancy. Let’s assume that you retire at 60 and live upto 85. How do you plan to fund your expenses for 25 years after retirement, at a time when you do not have any steady income?
Plus, considering inflation, i.e. the rise in prices of goods and services for regular use, your expenses will be much higher after retirement than it is today. For example, if your monthly expenses are Rs 35,000 right now, it would be Rs 80,000 per month in 20 years, considering you would want to maintain similar living standards.
Now, building a fund as large as a retirement corpus is a lifelong process. So, the earlier you start saving towards, the better it is.
Investment option to build retirement corpus: EPF, NPS, and Mutual Funds
- Step 2: Generating income during retirement:As much as it is important to ensure that you are saving enough for your retirement while you are working, it is equally important that you channelize that corpus correctly after retirement. Making the right investments will ensure that you have a steady income as long as you live.
Investment option for generating income during retirement: STP withdrawal/transfer from Mutual Funds, life insurance annuity and rental income.
|Building a retirement corpus||PF, NPS, Mutual Funds and Pension Plan|
|Generating income during retirement||STP withdrawal/transfer from Mutual Funds, life insurance annuity and rental income.|
Being in control of your finances and having the power of making a life choice without worrying about money are two things that we assume to be tougher than attaining Nirvana. However, having all the aspects of a complete financial picture in one frame ensures that your financial future is just picture perfect!