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G Murlidhar, MD and CEO, Kotak Mahindra Life Insurance Company explains how to make smart financial decisions for better gains.
Which of the following statements do you think are true about financial planning?
a. It is for wealthy people
b. It is for planning legacy
c. it is not meant for the youth
Well, all the above statements are false. Myths.
Financial planning is a step-by-step approach to arrange finances for one's life goals such as buying a house, getting married, or planning for retirement.
It helps a person to be in control of their finances such that they have monies available at the right time to realise their dreams and goals.
Start early
One common myth is that financial planning is only for the wealthy.
Life goals and needs are the same for everyone and so is financial planning.
In fact, those who start early stand to tremendously gain in the long run.
Take for instance, a 25-year-old salaried individual who aims to have a corpus of 1 crore when s/he turns 55.
If you start early at age 25, you just need to invest Rs 5,000 per month to reach that goal.
Instead, if you start investing at age 35, you will have to invest Rs 14,500 per month to achieve the same goal. That is the power of compounding.
Wealth creation is a long-term exercise. It needs continuous and planned investments.
The advantage of starting early is that it puts less strain on the investment requirements and takes one to the desired goals with peace of mind.
As the saying goes, 'money makes money'. That's exactly what happened in the above example -- the person invested approximately Rs 18 lakh, comfortably spread across 30 years and accumulated a corpus of Rs 1 crore.
Money makes money when you start early and do medium to long term investments.
Most people miss this key advantage of starting early and rather than giving 'time' to their investments, they end up risking their life goals.
Diversify your investments
The other key factor to consider is diversification of investment.
Diversification smoothens one's risk across different types of investments.
For portfolio allocation, one can use the thumb rule: Equity allocation = 100 -- age. So, a 25 year old can allocate up to 75 per cent of her/his portfolio to equity and the balance in Debt.
As one grows older, asset allocation can be gradually shifted.
There is, however, one step that is extremely crucial even before starting with investment plans. And that is protection from financial erosion by ensuring adequate cover against events such as accidents, disabilities, illness, hospitalisation and untimely death.
Starting early ensures that you get more than adequate protection at low prices.
You can choose between a varied range of investments below:
1. A term policy offers financial protection to the family in the event of death of policy holder.
2. Endowment plans offer dual benefits of protection as well as ensuring money is available at the right time for long term goals.
3. Whole life plans extend the benefits of protection and savings through out one's life.
4. Life insurance offers 'riders' which are low in cost but provide extra protection for specific situations.
5. Investments in life insurance is systematically diversified across equity and debt as per stipulations. Life insurance policies typically offer a guaranteed Sum Assured as well as additional bonuses accumulated over the years on policy maturity.
6. Life insurance policies enjoy 'EEE' (exempt-exempt-exempt) tax benefits -- the premium paid is eligible for tax deduction, bonuses declared during the policy period are tax exempt and the maturity value is also tax exempt.
Life insurance thus addresses multiple objectives of financial planning as well as provides protection.
The best way to predict the future is to create it. And the best way to create financial stability in one's life is by starting early with your financial planning.