16 Mar 2014

How Do I Plan My Finances?

People ask this question in various forms. The words may be different but the meaning is the same. How do I start investing? How do I secure my child's future? How do I save? Is this a good fund to invest in? These questions sound different but ultimately mean the same. This post is dedicated to friend who is about to be a parent and requested an article on sound financial planning for a child. All of us should plan our financial life. Here is how to do it.

1. Emergency Fund
First things first. Get an emergency fund in place. What is an emergency fund? It is six to eight months of living expenses stashed away in a fixed deposit or savings account so that any unforseen circumstances do not sway your balance. This is what maintains liquidity and gives you cash when you need it.

2. Life Insurance
Most of us need a life insurance and most of us need a term cover. A term cover is valid for a period of time e.g. twenty to thirty years and the premiums we pay are much less. If you have a child, please get a cover on yourself and not on the child. Try to get a cover for eight to ten times your annual income.If you are unsure of the need and type of policy, please read the article on life insurance http://financesunplugged.blogspot.in/2014/02/do-i-need-life-insurance-policy.html

3. Medical Cover
You need a medical cover and so do your dependents. If your company provides a medical cover make sure it covers all your dependents - your wife, children, parents, in-laws etc. If your parents are not covered under your organizations's insurance plan, get a cover separate cover for them.If you have an unstable job where job loss is a fear or you are an entrepreneur, consider getting your own medical cover. This becomes important so you do not have to dip into your emergency fund for a medical emergency.

4. Start A PPF Account For You and Your Spouse
I have written about a PPF account before. It is by far the safest and most practical investment going around. Start an account for both you and your spouse. If in doubt, please read my article http://financesunplugged.blogspot.in/2014/02/should-i-invest-in-public-provident-fund.html

5. Save A Percentage Of Your Salary Every Month
This is the age old advice given by our parents and grandparents. It made and still makes a lot of sense. Savings give you control, stability and peace of mind. Stick with saving some of your salary every month.

6. Invest
 This is the last point I would like to mention in terms of financial planning and this is exactly where it belongs. Ensure that  you get the rest of the things in place before you start investing in mutual funds. Start investing slowly and wisely. It is good to start with a safer instrument like a debt fund and move from there. Please make sure you understand mutual funds before you start investing in them. I will write more on mutual funds in the coming weeks.

7. Child Plan
Note that I started this article with - how can one plan his or her child's future? When a child comes into the family, people get jittery. Yes, being a parent is a big responsibility and gives an immense sense of pleasure. I do not recommend child plans because most of them come with exorbitant fees and invest in mutual funds without giving the individual much control over which funds to invest in. If you do the six points mentioned here, it will secure your and your child's future. If you think there is a good child plan out there, please evaluate it carefully. Calculate the real rate of return by subtracting all the expenses and commissions and then decide if it is worth it. If you think there is good child plan out there, please let us know about it. I would love to look into it too.

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