Be Your Own Financial Planner – Proven Tips for Financial Planning

A financial planner is a person who takes information from you and suggests a plan to manage and invest your money. As they say, ‘You are the best doctor for yourself because you know about your symptoms more than the doctor’. Similarly, you can make your own financial plan. Also, read our article on Financial Planning and Analysis.

It is true that a certified financial planner can suggest you a lot of options because he/she has knowledge about a variety of financial products which you might not be aware of. But, many people want to do such things on their own as they feel restricted to disclose everything to an outsider.

Dheeraj is one such guy. He works for a private company in Bengaluru. His parents live in his home town in Bhopal and are self-dependent. Dheeraj, his wife, and his school going kid live in their own house which is on a loan.

In this article, I would like to share a simple financial plan which anybody like Dheeraj can implement convincingly without disclosing his/her financial information to anybody.

Recipe of a Financial Planner

#1. Make an Emergency Fund

An emergency can strike anytime. It can be a medical emergency or financial burden due to job loss. This fund can make Dheeraj float in case of any such emergency.

Formula – The formula for calculating the amount of emergency fund is equal to monthly expenses multiplied by 6. Dheeraj calculated his monthly expenses as Rs 50,000. So the amount he has to save is Rs 3 Lacs.

Make an Emergency Fund
Make an Emergency Fund

Where to invest – If you are comfortable with investing in mutual funds, you can invest in any debt mutual fund. The returns are slightly higher than bank Fixed deposits. The details on which debt mutual fund to select can be checked here.

Dheeraj feels more comfortable with banks. So, he can go for multiple Fixed deposits (FD) of Rs 50,000 or Rs 1,00,000 each. The benefit of multiple FDs is that he can close few FD accounts in case of an emergency and the remaining FD accounts can remain active.

Emergency Booster – To give extra power to your Emergency fund, opt for a lifetime free credit card from any of the bank or credit card provider. Use this credit card only once in a year to stay active and pay the credit immediately after use. For the rest of the time, keep it in a safe place. The sole purpose of this card is to boost the emergency fund if required. In our example, Dheeraj has taken a home loan and thus he can easily get a credit card based on his credit history.

#2. Insurance – Get the ‘Good’ ones, close the ‘Not So Good’ ones

2.1 A Financial Planner always suggests a Term Life Insurance

Buy a Term Life Insurance for yourself. Don’t opt for a policy having any maturity benefit. Term insurance is solely for the purpose of insurance without any maturity of financial benefit. So, buy a plain vanilla Term insurance policy.

Formula – The minimum amount of Sum Insured to opt for is 10 times your annual income.

Dheeraj has taken a housing loan. So, if the loan financing bank has not given him any term life insurance policy to take care of loan, he should buy a fresh one. It will be different from the one he has opted above.

Formula – It should be equivalent to the loan amount.

Get an Insurance
Get an Insurance

2.2 Life Insurance with a Maturity Benefit

Life insurance policies with maturity benefit or child plan policies or retirement policies may not be beneficial financially. If you have opted them for investment purpose, check if they are meeting your target returns which should be more than the amount which you would have got by keeping the amount in bank FD.

Formula – Use a compound interest formula with the principal amount as each year’s contribution. Alternatively, you can calculate with formula available here or use financial calculator mobile application.

2.3 Other Insurances – Health, Vehicle, and Home

Health Insurance – Even if you have corporate health insurance provided by your employer, an additional family health Insurance policy should be available with you to have extra protection and to protect you and your family in the event of your joblessness.

Vehicle Insurance – If you own a vehicle, don’t forget to take an insurance policy and renewing it on time. Where Third party insurance is mandatory by Govt, a comprehensive policy covering your vehicle (Own Damage cover) and third party cover is preferable.

Home Insurance – Buy a basic Fire and allied perils, earthquake and Burglary Insurance cover policy.

#3. Life Goals

A financial planner makes a list of your life goals and assigns a time to them. List down the important financial goals of your life, assign a timeline and a value to the goals.

Dheeraj may have the following goals and by using the compound interest formula, he can calculate the amount which would be required when the time comes –

3.1 Child’s Education

Dheeraj should plan for his child’s higher education for which he should save enough. If the current cost of higher education is Rs 10 lacs, Dheeraj would need Rs 24 lacs after 15 years considering the inflation at 6%.

3.2 Child’s Marriage

For the marriage of child after 22 years, the cost will increase from Rs 10 lacs to Rs 36 lacs considering a 6% inflation.

3.3 Financial Planner should make Provision for Retirement

Save for Your Retirement
Save for Your Retirement

Dheeraj is 35 years old and will retire at 60 i.e. after 25 years. He has to save at least for the next 20 years. The monthly expense at present is Rs 50,000 i.e. Rs 6 lacs in a year. After 25 years i.e. at the age of 60, Dheeraj would need around Rs 26 lacs every year and at the age of 85, he would need around Rs 82 lacs a year. This has been calculated using the same compound interest formula.

In total, Dheeraj would need more than Rs 10 crore to sustain the same lifestyle for the next 20 years after retirement.

There will be many other factors which will impact this calculation like the home loan will be repaid fully or some other intermediary goal will be added.

#4. Investments

For life goals, the amount seems huge because of inflation. One should not worry, but to plan properly to achieve the goals. Although, the inflation increases, Dheeraj’s salary also increases. The early he will start saving, the better returns he will get. Every year, he should increase the saving amount.

Make Proper Investments
Make Proper Investments

4.1 Where to Go

It is difficult to achieve these targets by depending only upon bank FDs and other debt instruments like Public Provident Fund and Govt bonds.

One should take exposure to the equity market. Although it doesn’t guarantee good returns, the past track record has proven that if one stays long in the market, he/she will get decent returns i.e. returns more than debt instruments.

Investing directly in equity stocks is risky without proper knowledge, but mutual funds are a better option. A fund manager diversifies the risk by investing in a multiple of stocks and sectors.

Opting for good mutual funds with a proven track record can be trusted. You may visit various portals [1] or [2] to check the track records of all the available mutual funds.

In fact, nowadays, the facility of the selection of mutual funds is also available at various platform i.e. etwealth, etmoney, scripbox, etc. where you can get finally filtered mutual funds to invest without any further research.

A Good Financial Planner

A good self financial planner is one who starts early and stays for long. He/she should not worry about the typhoons in between. The market will go up and down, but the one who stays for long even in the turmoil will remain floated and reach his/her goal.

Do you think you can become your own financial planner? Send us your queries wherever you get stuck and together we’ll find a way out.

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(Disclaimer: The points mentioned in the article are based on the author’s own experience. Every individual has different goals and resources. For individual financial planning and analysis based on your profile, you should consult a Certified Financial Planner.)

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Sohil is a nature lover, born and brought up in the Himalayan town 'Almora.' He has a varied interest in financial planning, yoga, and nature.
The article was originally written by the author and it is being updated and maintained by the Editorial Team.

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