Cricket, Common Sense and a Basic Financial Plan

The MintWise team believes that this article on “Basic Financial Plan” is the most valuable article on this website. And that is because if you get this right, your Financial Life will be hugely successful. You will live happy and satisfied, and die happier because you would have done your best for yourself and your family. So even if it is a little long, do take the effort to read, and adhere.
 
A “Basic Financial Plan” sounds like a heavy dose to many of us.  But quite honestly, it is just common sense. And it is not for experts alone but for each one of us who already has some accumulated wealth or savings, or who earns a monthly income however big or small it may be.
 
 

1. First, PROTECT what you already have from uncertainties of life that can topple your plans and affect your family’s well being
2. Then, MAXIMIZE your wealth in a smart way by investing what you have + what you will earn in the future
3. Finally, PASS ON a good legacy when you die so that when you are ready to go, you are sure that your future generations will live well.

 
You will notice that this is just common sense. Even when you play cricket, you first protect yourself (with pads, helmet, gloves, etc.) and then start the game. You then maximize your score so that you win the match. You do this every time and with every season you groom newer and newer talent to keep doing the same for your team. That’s how great teams are made, isn’t it?
 

For the three points above to happen well, it is very important they have to be done in exactly the same order of priority.  The best way to represent this priority is by using a pyramid.  Why pyramid?  Because it demonstrates that if you want to reach big heights, you need to have a strong foundation (base).
 
Now that we have your attention, let us now understand each step of building a Basic Financial Plan.
 

 
Let’s say you are 32 years old, married with 1 kid of 2 years and have an income of Rs. 12 lakhs per annum. You have your own house with a current market value of Rs. 40 lakhs, Rs. 4 lakhs in Fixed Deposits, Rs. 1 lakh in a Savings Account, a Maruti Swift and an inherited plot of land.
 
Now imagine the possibilities of things going wrong.

• You get a heart attack and need to go through a bypass surgery
• Your home gets burgled
• There is an earthquake and your house collapses
• The company you are working for no longer needs you and you lose your job
• You meet with an accident and die!

 
Did we hear you say – “Hey these can never happen to me” or “Chances that any such thing can happen to me is very less” or “I can handle it if it comes”?
 
If you think, we are trying to scare you, you are absolutely right. And we do that for good reason. Incidents such as these can be devastating.  In the above example, a heart attack can wipe off your FD and your bank balances. If you also had a loan on your house can you imagine how difficult it will be able to pay back the balance, if at all? And your family could lose your income for ever if you were to die!
 
We hope none of these ever happen to you.  But you know that no one can predict it. If you are smart, rather than denying the possibilities, you will ensure that if anything were to happen at all, it will never affect you or your family.  So that just in case it does happen, there is enough money to tide over the situation for the rest of your lives.
 
Here are a few things you need to have.

1. An Emergency Fund – roughly 6 to 9 months of living expenses for you and your family.  This will help you in case you were to lose your job and need time finding a new one.
2. A Term Insurance Plan – so that in case you were to die young (accident, illness, etc.), your family gets enough money to replace the income that you would earn for them for the rest of your life had you been alive.
3. A Personal Accident Insurance Plan – so that if an accident incapacitates you physically (but you don’t die), at least your income is managed.
4. A Health Insurance Plan and a Critical Illness Cover – so that a sudden illness does not put you back by a large amount of money that could compromise on your family’s well-being.
5. Additionally you could look at Home Insurance to protect your most prized asset – your home (worth Rs. 40 lakhs!)

While they look like many ‘items’, the good part is that they are all very inexpensive if you buy right.
 

 
Once you are protected, you need to get your existing and future earnings to be invested in such a way that you are able to get maximum returns.
 
You will need to plan for

• Children’s education and marriage expenses
• Retirement expenses

 
One of your biggest enemies will be INFLATION.  And your investments will need to beat that.  To do this you may have to balance out on how much you will put in safe low-return investment options, how many in certain riskier high-return investment options, and how many in balanced options.  The proportion in each will depend on your age, your goals and the kind of appetite you have for taking risks.
 
Make your money work hard for you.  Build your investments through

• Fixed Deposits and Term Deposits
• PPF, PF, VPF
• Mutual Funds and Shares
• Real Estate
• Gold
• Commodities
• Forex, etc.

Smart selection and planning will ensure that all the expenses of your life are met comfortably and your family enjoys to the fullest.
 

 
When you come towards the end of your life, all you will need is satisfaction.  And there is perhaps nothing more satisfying than the fact that you and your family led a comfortable life, and that you were able to pass on a handsome fortune to your next generation so that they are financially strong to face their own future.
 
So you see by now that making your own Basic Financial Plan is just common sense.  All that is left now is to actually do it.
 
Views are welcome.