In first two parts of the series, we covered the importance of financial planning and the first 2 pillars of financial planning. In this concluding part we will cover the final 2 pillars of financial planning and wrap up this series.
To recap, the 4 pillars of financial planning are:
- Goals, Needs & Wants
- Budgeting / Savings Plan
- Investment Plan; and
- Security Plan
We covered the first 2 pillars i.e., Goals, Needs & Wants and Savings Plan in Part 2. Now we will delve into Investment Plan and Security Plan
Investment Plan:
The next stop in our journey is a well-rounded Investment Plan. The emphasis being on well rounded / well balanced. Now what do I mean by that and why?
A well-balanced investment plan is one where you will have different types of investments in the appropriate proportion. Examples of different types of investments being fixed deposits, mutual funds, gold, real estate etc. Also the amount you invest will be based on the risk on the investments vs your risk appetite. I have seen people to have investment plans which are very unbalanced. Some have most of their money in stock market, for some its all fixed deposits and for someone else its all real estate. In this approach you are over exposed to the dynamics of one asset class. That is not ideal in the long run. Years of research have shown that a balanced portfolio is a better way to grow money sustainably in the long run. I have covered this in detail in the article on Asset Allocation; “Asset Allocation – The Holy Grail Of Consistency”.
So for your investments, have a well balanced investment plan. An investment advisor should be able to help you with that. Alternately you can self educate. In addition the other articles on My Tenth Cent or any other personal finance website will also help you self educate.
Irrespective of whoever makes your investment plan, your investment plan should be a combination of the below listed investment categories:
- Equity: Unless you are an expert in share market, stick to equity mutual funds. You can read the article “Equity Mutual Funds – The Salt In Your Portfolio” to know more about how to invest in equity mutual funds. If you want to learn about share market, bond market and mutual funds in general, then download the e-Book “Road to Financial Freedom: Ten Lessons To Prosperity”.
- Debt: A combination of fixed deposits, PPF & debt mutual funds. If you have expertise in bond market, then you can consider investing in bonds as well. Your debt portfolio should have a combination of 3 to 4 types of debt products. The mainstay in the portfolio should be debt mutual funds. Debt mutual funds are a very tax efficient way to invest in debt markets. There is a full series on how to invest in debt mutual funds on My Tenth Cent. The articles in this series will give you a good overview of debt mutual funds and how to select good debt mutual funds.
- Gold: Gold can give stability to portfolios especially in times of extreme events. And gold has also given good long-term returns. You can learn more about gold as an investment: the history, supply-demand, outlook etc. in the article series on gold; “Is Gold A Worthwhile Investment”. If you are looking for the various options to invest in gold, then you can read the article, “How To Invest In Gold”.
- Real Estate: This is another important investment category. It has given good long term returns. But real estate is also a very difficult investment category. It is one investment category whose importance is over stated and the pitfalls understated. You can read more about real estate as investment in the articles on My Tenth Cent.
So, to sum up you should have a good, balanced investment plan with different assets in the right proportion
Security Plan:
The last pillar in securing your financial future is a proper security plan. The security plan should secure your life, legacy and investments. Because without securing these, our efforts on other pillars can become meaningless overnight. This is a vast topic and will be covered in detail in the other articles on My Tenth Cent. Here we will list down the key points only.
Security of life & earning: Insurance
Life Insurance
We all are quite familiar with Life Insurance. Thanks to the many generations of LIC agents’ efforts. I am presuming you have already taken one. If not, do you have a family to take care of? If so, what are you waiting for?
Without adequate life insurance you are leaving your family exposed and vulnerable. Anyone with a family to take care of should have a life insurance. That is a must. Do not risk being another heart breaking story. A story where a happy family is in dire straits overnight when the bread winner of the family is no more. And there is no life insurance.
Now even if you have taken Life Insurance, there are some critical questions you need to answer:
- Is your life insurance adequate?
- Have you made an educated decision? Or did you rush through going blindly by the agent’s recommendation?
- Have you taken the smart option amongst term plan, endowment plan and a ulip?
- Are you aware of the common mistakes people make when they take a Life Insurance policy?
You can find answers to these questions and more in the articles on Life Insurance that will be published soon.
Health Insurance:
I have seen families with 3 or 5 lakhs of health insurance, quite happy that they have enough health cover. Most people don’t realize that health costs have the highest inflation today. If someone comes down with cancer for example, your expenses could be in the range of 25 -50 lakhs. A major surgery could set you back by 5 to 10 lakhs. All these figures are as of today. Ten years later it will be more scary.
So, when it comes to health insurance, don’t take a cover based on what the costs are today. Take a cover based on what the costs will be tomorrow.
Again, some important questions to answer:
- Have you taken sufficient health cover or at least to the extent you can afford?
- Do you have a personal health insurance cover or are you dependent on the cover provided by your employer?
- Are you thinking you will increase the health insurance cover later when you get older?
You will find answers to these questions and more in the Health Insurance articles that will be published soon.
Securing your legacy: Nominations, Instructions & Will
In the rat race of life, how many of us actually stop and ask the question why am spending so much time to earn a living? When I did, I realized that there are only 3 reasons for spending all my life doing a job and earning money:
1. To meet my obligations
2. To fulfil my aspirations;
3. To leave a legacy for our children
As we become older and older, the more we want to leave a legacy for children. We give a lot of focus to save money for our children. Yet it’s a shame that we don’t pay enough attention to whether the wealth will reach our family or not.
I will narrate a story that happened a few years back and made a lasting impact on me. There was this family – husband, wife and 2 children. The eldest child got admission in a university abroad. The whole family decided to go and drop the child at the university. They also decided to add on a short holiday to the trip. On the trip they had a tragic car accident where husband, wife and the eldest child passed away. The only surviving member was the youngest child, a minor. I wonder what happened to the child? Did his family members know the wealth left by his parents? Did he get a proper life & education after?
Now I do not think anyone can ever prepare for such a situation. But it is not difficult to have some basic things in place if you or your wife or both are not around. Basic things include ensuring you keep a record of your investments and tell your wife and a close relative, ensuring all your investments have proper nominations and have a will.
You can download a free checklist that will be published soon on this website. This checklist will help you be better prepared. There are also going to be more articles on securing your legacy that will be published soon.
Cyber Security
Are you wondering why am I diverting from finance into IT domain? Well, that’s because today a lot of our wealth is online. Our bank accounts can be accessed online. Our mutual fund investments are accessed online. Even gold investments (if ETF) are online.
So, hopefully you would now appreciate why Cyber Security is very important. Unfortunately, most people who I come across just don’t pay enough attention to this point.
We all think that we are nobody important for hackers. But some of the stories of cyber threats would astonish you. You can read more about these stories in a separate article that will come soon on this website.
The best part is, its quite easy to have high cyber security. Adequate awareness and some basic hygiene disciplines is all you need.
A checklist that will be published soon on this website will help you navigate yourself to safety
Conclusion
I hope this 3 part series on financial planning has given you a good holistic perspective on financial planning.
We covered the importance of understanding your goals, needs & wants. How a savings plan can help you save more money for your goals. A well rounded investment plan can help you achieve your goals on time. And a proper security plan will ensure your wealth & legacy is protected.
In short please remember that if you are failing to plan then you are planning to fail. Many people go through their lives without thought or plans about their finances. Often such people end up wondering why they never have savings? Why they struggle to achieve financial freedom? Why they struggle to meet their goals?
I hope the articles and the activities herein will help you take a step back and talk stock.