Crucial Financial Planning To Do Before 30
On one hand, with the change in standard of living and people becoming more & more fashion conscious, it’s generally noted that 50 has now become 30. However cool it may sound, there is an exception to this belief: Yes, in Financial Planning Arena. In here, even 30 is 50. So, based on my own understanding & whatever little bit of knowledge I have, sharing a few tips.
Tips for Better Financial Planning & Secure Retirement
1) Starting Early and Benefit of Compounding
When I opened a PPF Account in SBI Pune and deposited Rs. 5,000/- from my first month’s salary, I was 24, I had a lot of my college friends who were surprised and literally asked me “Why the Urgency, Dude ? You seem to have gone nuts” They had a serious laugh when I replied saying “For my retirement !” I still stick by that notion. The first basic step I realize is starting early, very early (My dad opened it when he was 39, very late I think). So much so that by then, you get into the savings mode, which then becomes a habit and a compulsion of sorts. Now, we should not become a miser but small steps can make wonders. Besides, if you discipline yourself and do not withdraw from a set account, in my case say PPF, over next 30 years (difficult but possible), during the later part of your years, the interest you earn will be humongous. There will be a benefit of compounding (Interest on interest). Trust me, do some manual calculations, and see how much interest you earn by such savings @ say when you are 55, with 3 years to go for your retirement. You will be surprised and happy ! By the way, investment in PPF is tax deductible under Section 80 C to the tune of Rs. 1.50 Lacs currently.
2) Emergency Fund for 6 Months
As a special precaution, say in the event of you losing your job or something like that, you should always have 6 months cash-in-hand with you. Eg: If your net take home salary is Rs. 50,000/- you need at least Rs. 3,00,000/- for emergency to cover your next 6 months’ expenses. So, in case this unfortunate event happens, you, your spouse, your family and (your children especially) don’t feel the pinch and get affected. I strongly feel financial issues at home can really leave a bad lasting impression on the minds of children.
3) Opt for Insurance
Life is extremely unpredictable. I have seen close enough to have some authority to tell my readers on this. Take a Term Insurance (In today’s times, minimum Rs. 1 Crore is a necessity). The premium you shall have to pay is around Rs. 8,000/- a year. Although you won’t get this premium back, the benefit takes place only if you are not there. And the earlier you take it, lesser the premiums. Apart from Term Insurance, opt for a separate medical insurance for self and dependents too. Although your company may have a Mediclaim & Group Personal Accident (GPA) Cover in place, rising medical costs can’t be underestimated. Besides, you may take tax exemptions under Section 80C & 80D. I read these 2 wonderful articles by renowned publications Yahoo! Finance & Business Today and both of them more or less talk about why opting for insurance is the need of the hour.
4) Avoid Debts As Far As Possible
I know its a bit too harsh. There are so many banks and financial institutions offering competitive interest rates on Car Loans, Home Loans and Personal Loans that you may feel that you could easily pay off the debt, without even feeling the pinch of it. But, on a long term note, the amount of interest you pay is much more than the monthly EMI you have in your mind. Agreed that you would want to have your home (though however costly a house is, if you are staying in it, it’s a dead investment). But a personal loan for a foreign trip – is a strict no no. Period !
5) PF Contribution & Annual Bonus
PF Contribution in India for Indians form an integral part of their financial planning. While the Government employees may look forward to Pension schemes, employees from private sector heavily depend & look forward to this corpus eagerly, post retirement. Employees Provident Fund Organization will happily accept a 20% voluntary contribution from an employee, in place of the normal 12% that your company deducts. Just approach your HR and intimate them to start deducting 20% from your salary. While your company will contribute 12% as per the practice, you are free to invest that extra 8% and take benefit of compounding as well. Contribution to PF Account is tax deductible under Section 80C. If you get Diwali Bonus or Variable Incentives at the end of the year, invest 50% in your PPF or FD, and enjoy the other 50% – you are free to spend it.
No matter how much you do, don’t get into that “Surpriseeeeeee !” mode, how your wife treats you on your birthday. Whatever you invest & wherever you invest, there should be at least one person in the family who knows it all. So that the main purpose of all this exercise is attained and benefit reaches the correct person, in case you aren’t there all of a sudden. I remember a top official of my company, who had a Merc S Class, a laptop worth Rs 1.50 Lacs and a mobile worth Rs. 80,000/- and living such lifestyle, suddenly had a heart attack in his car while coming to office in morning and the wife & everybody in his house didn’t know a damn about where all he invested & what all financial planning he did. I am not sure if the poor lady received all that he had accumulated… Sad but true 🙁
There are some other things in life that may require separate financial planning like your Childrens’ education and their marriage. An MBA or any equivalent degree from a very recognized university or an institution will be extremely costly 20-25 years down the line. Same is the case about their marriage. May be you could opt for an SIP or an RD for this.
How much money you want in your retirement solely depends on you and your current & future lifestyle and the kind of financial planning you do. If you start saving early, the load on you to meet your target is less. If you get delayed even by 5 years, the load becomes 3 times more.
“Always spend what is left after saving, and not save what is left after spending” – Warren Buffet