Diwali is here. The festival of lights. Time for a vacation, family get-togethers, sweets, and bright crackers and fireworks.
This is also a good time (just like any other day on the calendar) to review and throw light on shortcomings in your financial planning. To see if you have got your personal finance basics covered. And this is a serious matter. We spend too much time figuring out the best investments for our portfolio. While there is nothing wrong with this, such an approach to finances can sometimes make us skip the simpler yet much more critical parts of financial planning. In this post, let us look at some of these aspects.
#1 Purchase Adequate Insurance
If you go wrong with your investments, you will get a second chance. However, if you go wrong with your insurance, you may not get another chance since you may not be around to rectify your mistakes.
If you have a young family, think about unpaid home loans. Or how your kids will go to schools or colleges of their choice? Or who will take care of the financial needs of parents? Or how will your family maintain a respectable lifestyle? If you are worried about how your family will manage all these things in your absence, buy a life insurance plan. And do not just tick the checkbox. Buy ADEQUATE life insurance cover. While there are scientific ways to get a sense of your life coverage requirement, a good thumb rule is to buy life cover for 10-15 times your annual income.
If you think healthcare costs are rising fast, consider buying a health insurance plan. With an adequate health cover, you can ensure that a prolonged hospitalization does not set back your finances by a big amount.
In addition, consider a scenario where an accident renders you disabled and compromises your ability to earn. Life insurance won’t come into play since you are still alive. Health insurance will only cover the treatment expenses. What about the loss of income? A personal accident cover will come in handy here.
Related Reading: Get Your Insurance Portfolio Right
#2 Do Not Mix Insurance and Investments
We hear this maxim all the time. But don’t we do exactly the opposite?
ULIPs and traditional life insurance plans offer the dual benefit of insurance and investment and are investors’ favourite. This is due to lack of awareness on investors’ part and the aggressive sales practices by the intermediaries. Tax benefits also skew the preference towards these products.
Investment experts advise against such combo products since such products offer low returns. That’s right but there is an even bigger problem with such products. While not desirable, it is still acceptable to invest in products that offer suboptimal returns provided these let you sleep peacefully at night.
The biggest problem with ULIPs and traditional life insurance plans is that you run the risk of staying underinsured. Now, that is not acceptable.
To get a cover of Rs 1 crores in a ULIP or a traditional plan, you will have to pay an annual premium of Rs 5 lacs to 10 lacs. Very few can afford such a high premium.
If you buy life insurance through such products, you run the risk of staying underinsured. If you can pay an annual premium of Rs 1 lacs (and not Rs 5 lacs for Rs 1 crore cover), you will get a cover of Rs 20 lacs. That may not be sufficient. Your life insurance requirement does not go down because of your affordability.
If you kept insurance and investment separate, you could have bought term insurance cover of Rs 1 crores for Rs. 10,000-15,000 per annum. And you could have invested the remaining Rs 85,000-90,000 in an investment that offers a potential of better returns.
#3 Invest with a Purpose
Many of us consider investing as an annual exercise. During the tax-saving season, we pile up whatever is thrown at us without seriously considering the utility of such products in our portfolio.
However, if you are serious about wealth creation and achieving your financial goals, think of investing as a process and not as an event.
Take a goal-based approach to your finances. Think of major future events in your life — purchase of house, kids’ education, travel etc.
For short term goals, invest in a conservative portfolio built around safe and liquid products such as fixed deposits and debt mutual funds.
For long term goals, you must consider taking some risk unless you have a very low risk appetite and sufficient money for all your financial goals. Take an asset allocation approach. Decide how much you want to allocate to different kinds of assets (equity, debt, gold, real estate etc.) No right or wrong answers here. Your preferred asset allocation depends on your age and risk appetite.
Thereafter, select investment products within each asset class. And that’s where many of us spend most of our investment time. Picking the best stock or equity mutual fund to invest in. You can do that too but if this confuses you too much, pick up a couple of index funds or reach out to a SEBI registered Investment Adviser. Review and rebalance at regular intervals.
Related Reading: My Favourite Tax-Saving Investment
#4 Your Family Must Be Aware about Your Investments and Insurance
This is super important. You did everything right. Bought adequate insurance and made goal-based investments. However, you didn’t keep your family in the loop. They didn’t know about your insurance policies and investments.
In case something happens to you, they won’t make the claim on your insurance policy. How will they? They don’t know you had bought a life insurance plan. And this is not uncommon. Thousands of crores of rupees lie unclaimed with insurance companies. The policies have matured, the insurance company is ready to pay but nobody is there to claim.
Note that these unclaimed amounts are only for the non-term policies. This does not include term insurance plans where the claims were not made despite the demise of the policyholder.
The same applies to your investments too. Your family members can access the investments only if they know about your investments.
What good is your meticulous planning if your family is unaware of your insurance policies and investments. Here is what you must do.
- Share details of your insurances and investments with your family. You can share details in a physical folder or in a shared Google drive folder.
- Get your nominations right and/or prepare a will. Your family will be able to access your investments easily after you. In absence of nominations and will, your family will have to go through a long-drawn-out legal process to access the investments.
- Your family must also know how to manage the money. Otherwise, they will make the mistakes you avoided so diligently. Help them learn how to manage investments OR put them in touch with a trusted friend/investment advisor who can help them in your absence.
#5 Exercise Discretion While Taking on Debt
This is extremely important, especially during the festive season from Navratri and Diwali until the new year. During the festive season, there is a deluge of offers, discounts and cashbacks from almost everyone.
When you take a loan, you borrow from your future cash flows. Ensure that you strike balance between the present and the future and not borrow too much.
Credit cards, No-cost EMIs, instant merchant EMIs and BNPL make it easier to buy expensive products. But you must repay what you borrow. Therefore, do not borrow what you can’t repay.
Do not take it to the other extreme either. And that can happen if social media heavily influences your thinking. Many twitter warriors who advise against any kind of debt including mortgages say so under heavy dosage of hypocrisy.
Not all debt is bad. Use your judgement and exercise discretion.